EMPLOYMENT LAW: Can Employers Really Take a Deep Breath in the Wake of Epic Systems Corp. v. Lewis?

Overview

Earlier this year, the Supreme Court of the United States upheld the enforceability of individualized arbitration agreements as a matter of law in Epic Systems Corp. v. Lewis. The decision left employers everywhere taking a collective and long-sought sigh of relief. But how protected are employers, really?

In Epic, the Court consolidated three cases in which employees attempted to litigate employment disputes through class or collective actions despite having earlier entered into employment contracts that provided for individualized arbitration proceedings. In a 5-4 majority opinion, written by Justice Gorsuch, the Court found that the employers and employees contracted to resolve employment disputes through one-on-one arbitration, and, in direct opposition to plaintiffs’ arguments, neither the Arbitration Act’s savings clause nor the NLRA allowed the employees to disregard their employment contract and seek collective or class action litigation.

Though the Court’s decision is undoubtedly a substantial victory for employers everywhere, additional considerations must be made by employers to adequately protect themselves. In addition to ensuring that mandatory individualized arbitration agreements now exist within current and future employment contracts, employers need to consider the savings clause of the Arbitration Act which will still allow courts to invalidate arbitration agreements through generally applicable contract defenses.

History

Enacted in 1925, the Arbitration Act established a liberal federal policy favoring arbitration agreements with the purpose of requiring courts to recognize arbitration agreements as valid, irrevocable, and enforceable and to respect the parties’ chosen arbitration procedures. In 2012, however, in the case of D. R. Horton, Inc., 357 N.L.R.B. 2277, the National Labor Relations Board asserted that the NLRA effectively nullifies the Arbitration Act in cases like Epic Systems where employees and employers contracted for individual arbitration. Since that time, there has been confusion in the courts over the conflict between the Arbitration Act and the NLRA, and the Supreme Court granted certiorari in Epic Systems to clear the confusion. The Court’s decision establishes that there is no conflict between the two acts and that “employees’ arbitration agreements must be enforced as written,” ensuring that arbitration agreements in employment contracts will continue to be upheld in future.

Court's Decision

The employees first argued that the Arbitration Act's savings clause allows the Court to refuse to enforce the agreements since illegality is a ground at law for the revocation of any contract. They argued that requiring individual arbitration was illegal in that it was in direct contravention to the NLRA's guaranteed right to organize and act collectively. Relying on its earlier decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Court found that the employees never suggested that their agreements were obtained fraudulently or under duress or that they were unconscionable. Rather, the employees objected to their agreements based solely on the fact that they required individualized arbitration. The Court held that an argument that “a contract is unenforceable just because it requires bilateral arbitration,” regardless of whether it sounds in unconscionability or illegality, is an argument that, under Concepcion, impermissibly applies only to arbitration.

Next, in an attempt to convince the Court that the NLRA displaces the Arbitration Act, the employees argued that their right to collective and class action litigation is ensured by Section 7 of the NLRA which refers to “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The Court disagreed with the employees and stated that it had heard and rejected efforts to conjure conflicts between the Arbitration Act and other federal statutes in many cases over many years and clearly stated that Section 7 of the NLRA guarantees employees the right to unionize and bargain collectively but does not provide employees with the right to demand collective or class action in any judicial or arbitration forum.

In summary, even in light of the Court’s decision in Epic, there are still considerations to be made by employers who want to ensure they are not left exposed to an invalidation of an arbitration agreement or a class action suit. 

  • Employers with mandatory arbitration programs in place should review those programs to ensure that their terms are not unconscionable and that they are not subject to any other generally applicable contract defenses.
  • Employers with voluntary arbitration programs should consider making their programs mandatory but must also ensure that the process of entering into the employment contract is free from duress in both its execution and its terms.
  • Employers with arbitration agreements that allow for class arbitration should consider including a class waiver provision, which the Court explicitly determined was not precluded by the NLRA or the savings clause.
  • Employers without arbitration agreements should weigh the pros and cons of arbitration to determine whether arbitration or litigation is best for them and their employees. If arbitration is the right choice, they should consider making mandatory individualized arbitration a part of current and future employment contracts.

Finally, employers must be aware of state and federal laws that prohibit individual arbitration for certain types of disputes and keep apprised of new legislation affecting arbitration agreements.

[1] In her dissent, Justice Ginsburg noted that most employees do not possess the same bargaining power as their employers and are not mutually contracting the provisions of their employment contracts. In fact, the employees in this case had to agree to mandatory one-on-one arbitration as a condition of continued employment, amounting to a “take it or leave it” negotiation in which the employees had no bargaining power. The Dissent urged that preventing collective or class action arbitration fosters the power imbalance between employers and their employees and essentially removes any incentive for employees to seek redress for their smaller, individual claims. 

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