Recent U.S. Supreme Court Decision Concerning Arbitration

On May 21, 2018, the United States Supreme Court decided a significant case involving arbitration clauses in employment agreements. The court ruled that employees may be compelled to arbitrate wage-and-hour claims on an individual basis and may be precluded from joining large class or collective action lawsuits. The decision is important because employees and plaintiff’s lawyers may determine that wage-and-hour claims are not worth pursuing if they cannot be asserted collectively in court and instead must be brought individually and presented to an arbitrator.

One of the plaintiffs in the Supreme Court case was a junior accountant at Ernst & Young named Stephen Morris who had signed a standard form agreement with his employer that he would arbitrate any employment disputes. There was no negotiation concerning the agreement’s terms. It was provided to Morris and other employees in an email stating that continued employment would constitute assent to its terms. The agreement permitted employees to choose the arbitration provider and stated that the arbitrator could grant any relief that could otherwise be granted by a court.

After Morris’ employment ended, he sued Ernest & Young, alleging that he and other junior accountants had been misclassified and were owed overtime pay under the federal Fair Labor Standards Act. Morris sought to litigate the claim on behalf of himself and a nationwide class of similarly situated individuals, thereby creating very significant potential exposure for a large organization such as Ernst & Young. The district court dismissed Morris’ federal court lawsuit and required him to arbitrate his individual claim if he wanted to pursue it. A federal appeals court, however, reversed the lower court and reinstated Morris’ lawsuit based on its view that the National Labor Relations Act allows employees—both unionized and non-unionized—to engage in “concerted activity” concerning wages and other terms of employment, and that pursuing wage claims as a class or collective action was a form of concerted activity.

The Supreme Court ruled squarely on the side of employers. The court held that the Federal Arbitration Act mandates enforcement of arbitration agreements unless there is a clear contrary command from Congress. The court rejected the argument that the National Labor Relations Act limits the ability of employers to require arbitration of wage disputes or that engaging in class action wage-and-hour lawsuits is a form of concerted activity that cannot be abridged.

The court’s decision was 5-4, with the conservative justices in the majority. The majority opinion was written by recently appointed Justice Gorsuch. Justice Ginsburg wrote a lengthy and impassioned dissent arguing that the ruling would lead to under-enforcement of wage and hour laws designed to help vulnerable workers. Business groups praised the decision; unions and employee advocacy groups criticized it. The decision is consistent with a trend of cases in recent years enforcing arbitration clauses in employment, consumer, and other agreements.

Employers should consider arbitration agreements as a way of minimizing risk of large class or collective actions such as those alleging misclassification of workers, failure to pay minimum wage or overtime, failure to compensate for rest or meal breaks, or other allegedly unlawful pay practices. Arbitration is not necessarily a “get out of jail for free card,” but it is often viewed as more business-friendly, because arbitrators are typically business people, retired judges, attorneys, or other professionals who may have a more favorable view of management than members of a jury. Because arbitration is conducted privately on an individualized basis, the level of exposure and negative publicity is substantially reduced.

For more information about the Supreme Court’s decision, how it may impact your business, and whether you should use arbitration agreements with your employees, please feel free to contact us.

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Ansis Viksnins