Supreme Court Approves Obtaining Class Action Waivers Through Arbitration Agreements – What Now?

The Supreme Court recently ruled in a 5-4 decision that an employer may require an employee, as a condition of employment, to enter into an arbitration agreement in which the employee agrees to waive the right to bring a class or collective action. This ruling is significant for the restaurant industry in which employers have been subjected to a multitude of class and collective actions, particularly focused on wage and hour issues, such as whether the employer unlawfully took a tip credit against the minimum wage paid to its employees and/or improperly administered a tip pool.

History of Collective Action Waiver Legal Dispute

Since 2012, the National Labor Relations Board (NLRB) has held that class and collective action waivers in arbitration agreements violate Section 7 of the National Labor Relations Act (NLRA) (hereinafter “Section 7”). Section 7 guarantees employees the right to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection” or what is commonly referred to as “protected concerted activity” regarding the terms and conditions of the employees’ work.

The Fifth Circuit rejected the NRLB’s position in National Labor Relations Board v. Murphy Oil USA, Inc.,finding that the Federal Arbitration Act (FAA), which promotes the enforcement of private arbitration agreements, trumped any argument by the NLRB under Section 7. However, the Seventh and Ninth Circuit Courts of Appeals held that the Section 7 assurance that employees may engage in “protected concerted activity” fits within the “savings clause” of the FAA. See Epic Systems Corp. v. Lewisand Ernst & Young LLP v. Morris. The FAA “savings clause” permits the avoidance of the enforcement of an arbitration agreement if there are grounds that exist “at law or in equity for the revocation of any contract.”

May 2018 Supreme Court Decision

The Supreme Court considered each of the foregoing decisions and determined that class action waivers within arbitration agreements must be enforced absent some future amendment by Congress to the FAA. The majority of the Court:

  • Held that the FAA (passed in 1925) clearly requires enforcement of private arbitration agreements according to their terms.
  • Rejected the argument that Section 7 rights under the NLRA (passed in 1935) trump enforcement of an arbitration agreement by means of the savings clause of the FAA.
  • Held that one Act of Congress will displace another only upon a showing of a “clear and manifest” congressional intention to do so and that “implicit” repeal of one statute by another is strongly disfavored.

According to the majority, the language of Section 7 does not even suggest that it was intended to grant employees the right to file class or collective actions much less carry a “clear and manifest” intention to displace the FAA’s direction to enforce arbitration agreements according to their terms.  The Court further held that the “savings clause” of the FAA was only intended to permit the avoidance of enforcement of arbitration agreements based upon grounds generally available for the avoidance of the enforcement of any contract (fraud, duress, etc.) as opposed to defenses uniquely targeting the enforcement of arbitration agreements such as the argument being made under Section 7.

What it Means for Employment Agreements in Restaurant Industry

Employers have generally given mixed reviews regarding their experiences with arbitration agreements. Initially, employers believed that litigation expenses might be contained in the arbitration context, but that has generally proven not to be true. Furthermore, employers have found that arbitrators seem less reluctant to grant summary judgment (dismissing the case without need for the actual arbitration proceeding (the “trial”)) than federal court judges where many employment-related cases are adjudicated.  Anecdotal evidence even suggests that arbitrators are prone to “split the baby” when ruling in arbitration disputes and that arbitrators can be just as unpredictable as juries. But, when faced with a class or collective action case, many employers have been relieved that their arbitration agreements include a class action waiver. (Although some employers have then had to face the unwelcome reality of facing hundreds of individual arbitration proceedings.)  

Note that the enforcement of arbitration agreements remains a hot topic as a result of the #MeToo movement. Some have argued that arbitration agreements permit employers to cover up the harassment of their employees by litigating such issues privately rather than in open court. Congress and some state legislatures have passed or are now considering laws prohibiting mandatory arbitration of sexual harassment claims. How such laws will be impacted by the Court’s ruling discussed above has yet to be determined. So while employers may be considering initiating the use of arbitration agreements with class and collective action waivers at the workplace in light of the Supreme Court’s recent decision, employers should continue to monitor these developments.