Arbitration Update: Avoiding Employment Class Actions through Arbitration Agreements
September 10, 2014
Recent years have seen a dramatic increase in the number of class-action claims being brought against employers by their hourly workers, in which the workers seek compensation for alleged failure to pay overtime wages. Oregon employers are hardly immune to this trend, and it is not confined to the Portland area, with several overtime class actions having been filed in Eugene courthouses in recent months.
Having to defend against this type of lawsuit can impose crushing costs on your business. One potential solution is to implement a mandatory arbitration program throughout your workforce that contains a provision obligating your employees to pursue in their individual capacities any employment claims that they might later wish to bring against you, rather than pursuing them on behalf of a class or as part of a class. This is known as a “class-action waiver” provision. Implementing such a provision can greatly reduce the risk of your business being targeted for class-action lawsuits, and serve as an effective tool for defending against them if your business is targeted.
The Danger Confronting Employers – Overtime Class-Action Filings Skyrocket
Recent years have seen a dramatic increase in the number of lawsuits brought against employers under the Fair Labor Standards Act, or FLSA, seeking payment of overtime compensation. Statistics maintained by the federal courts show that 8,126 FLSA lawsuits were filed in the federal courts in the fiscal year ending on March 31, 2014. Moreover, thousands of additional claims are filed in the state courts every year, alleging violations of state overtime laws modeled on the FLSA.
Although the federal statistics do not distinguish between individual claims and class-action claims, employment law attorneys know from firsthand experience that many of these FLSA claims (indeed, an ever-increasing share of them) are brought in the form of class actions. One legal theory de jour goes as follows: (a) the employer failed to provide full (30-minute) meal breaks, during which its employees were relieved of all duties; (b) this means that the employees effectively “worked” through each scheduled break; (c) the employer routinely deducted 0.5 hours from their timesheets anyway; and (d) as a result, numerous employees ended up working overtime hours for which they were never compensated (because their workweeks exceeded 40 hours, once the time deducted from their timesheets for meal breaks is added back).
This trend has significant implications for Oregon employers with sizable hourly wage workforces. The most obvious is that an employer targeted for such a lawsuit faces a much steeper payout if it is found liable to a whole class of employees, as opposed to just one. Less obvious, but equally significant, that payout will invariably include a large attorney-fee award. The FLSA allows victorious plaintiffs to recover attorney fees, and class litigation routinely produces astronomical fee awards because such awards are generally based on the number of hours plaintiffs’ counsel spends on the case, inevitably a large number in class-action cases because class litigation is inherently complex and time-consuming. Relatedly, even if an employer wins the lawsuit, a class action is hugely expensive to defend, involving as it does a complicated initial procedural dispute over whether class-action litigation is appropriate, followed by a jury trial on the issue of liability to the class if the court determines that it is. From a practical (costs) standpoint, this is akin to defending two lawsuits in one.
In a very real sense, then, where class-action overtime claims are concerned, the employer usually “loses” as soon as it is sued. However, a recent decision from U.S. Supreme Court reveals an approach that might help shrewd employers avoid this fate: implementing a pre-dispute, mandatory arbitration program that includes a class-action waiver provision.
How Arbitration Programs Can Effectively Eliminate an Employer as a Target
In 2011, the U.S. Supreme Court decided the case of AT&T Mobility LLC v. Concepcion, which signaled a way that employers might be able to avoid becoming targets for overtime class actions. In that case, the plaintiffs challenged the validity of provisions in their boilerplate contracts with AT&T that: (a) required them to bring any disputes to arbitration, instead of bringing them in court (the “mandatory arbitration agreement”); and (b) provided that they had to arbitrate their claims in their individual capacities, rather than on behalf of a class or as a member of a class (the “class-action waiver” provision).
The plaintiffs were residents of California, and a California law provided that such class-action waiver provisions could not be enforced within the state. Based on this law, the plaintiffs argued that AT&T could not compel them to go to arbitration, in lieu of their preferred option of participating in a class-action in federal court. The Supreme Court disagreed, holding that the California law in question was preempted by the Federal Arbitration Act, or FAA.
The fundamental purpose of the FAA is to promote the arbitration of disputes as an alternative to litigation in the state or federal courts. To promote that goal, the FAA provides that agreements to arbitrate “shall be valid, irrevocable, and enforceable” (9 U.S.C. § 2), subject to limited exceptions.
In Concepcion, the Supreme Court reasoned that the right parties have under the FAA to contractually agree to arbitrate any future disputes between them includes the right to choose with whom they will arbitrate. This right, in turn, includes the right to specify in the contract that the parties will not pursue any claims as representatives or members of a class. As the Court saw it, the principal advantages of arbitration include informality, efficiency, and relative lack of expense. In its view, requiring businesses to engage in arbitration with a whole class of plaintiffs would “sacrifice” each of these advantages. Thus, the California law purporting to invalidate class-action waivers in arbitration agreements was invalid because enforcing it would frustrate the FAA’s fundamental goal of promoting arbitration. Specifically, if the only choice businesses are left with is between litigating a class action in court or litigating a class action before an arbitrator, they will likely choose the former option, because courts are more familiar with class proceedings, and, in any event, all the essential advantages of arbitration disappear when the arbitrator is forced to manage a whole class of plaintiffs.
Concepcion involved a consumer class action, not an employment class action. Nonetheless, following Concepcion, some employers began asking their employees to sign mandatory arbitration agreements with class-action waiver provisions, concluding that the Court’s reasoning in Concepcion applied with equal force to arbitration agreements entered into in the employment context.
That was not the end of the story, however. Indeed, a complication soon arose. In a 2012 case involving the company D.R. Horton, the National Labor Relations Board (NLRB) concluded that the use of class-action waivers in the employment context is inconsistent with Section 7 and Section 8 of the National Labor Relations Act (NLRA), which provide both union and non-union employees with the right to engage in “concerted activities for the purpose of … mutual aid and protection,” and make it an “unlawful labor practice” to interfere with that right. See 29 U.S.C. §§ 157, 158(a). The NLRA concluded that participating in class actions relating to wages or to other conditions of employment constitutes “concerted activity” under the NLRA, and that the right employees possess under the NLRA to participate in such activity trumps the right parties have under the FAA to enforce contracts that specify that they will not litigate their disputes as representatives or members of a class. In other words, the NLRB reasoned that the Supreme Court’s ruling in Concepcion did not extend to arbitration agreements entered into in the context of employment relationships.
However, to date, the federal courts of appeal (which have greater authority within their respective jurisdictions than the NLRB) have not looked favorably on the NLRB’s theory. For example, in the D.R. Horton case itself, D.R. Horton appealed the NLRB’s decision to the Fifth Circuit Court of Appeals, and, in late 2013, a panel of judges for that court rejected the NLRB’s conclusion and held that, under Concepcion, an employer can enforce a class-action waiver provision in an arbitration agreement with an employee. See 737 F.3d 344, 358 (5th Cir. 2013). Litigants in two other cases in different federal appellate circuits have also argued the NLRB’s theory, and the court rejected the theory in each case. See Owen v. Bristol Care, Inc., 702 F.3d 1050, 1055 (8th Cir. 2013); Sutherland v. Ernst & Young LLP, 744 F.3d 290, 297-98 n.8 (2d Cir. 2013). Conversely, no decision from a federal court of appeal has approved or adopted the NLRB’s position to date.
The Ninth Circuit Court of Appeals—which has jurisdiction over Oregon, among other states—has not had occasion to definitively rule upon the legal theory that the NLRB advanced in the D.R. Horton case. In the recent case Johnmohammadi v. Bloomingdale’s, 755 F.3d 1072, 2014 U.S. App. LEXIS 11743, * (9th Cir. June 23, 2014), the plaintiff argued the NLRB’s theory, but the court determined that it was not necessary, on the specific facts of the case, to reach the issue whether an employee can be compelled to waive his or her right to participate in a class action as a condition of initial or continued employment. While acknowledging “some judicial support” for the proposition that participating in a class action is a “concerted activity” protected by the NLRA, the court found no basis to conclude that Bloomingdale’s “interfered” with any right that the plaintiff might have had under the NLRA. The court reached this conclusion based on the fact that Bloomingdale’s gave the plaintiff a 30-day window, at the beginning of her employment, during which she could opt out of its mandatory arbitration program, with no negative consequences for her employment. Id. at *5. That opt-out alternative precluded any finding of “coercion,” and, in the absence of any coercion influencing the decision, the court “fail[ed] to see how asking employees to choose” between civil litigation in a class setting or individual arbitration “can be viewed as interfering with or restraining their right to do anything.” Id. at *10-11.
The court’s statement in Johnmohammadi that there is “some judicial support” for the proposition that class actions are “concerted activities” protected by the NLRA could be viewed as somewhat disconcerting by employers that have, or plan to adopt, mandatory arbitration programs that employees must agree to as a condition of employment or continued employment. (Such programs are commonly referred to by plaintiffs’ attorneys as “cram-down” agreements.) However, for a number of reasons, it would be a mistake to read the court’s statement as any kind of implicit approval of the NLRB’s position in D.R. Horton.
First, just like the Johnmohammadi court, the Fifth Circuit panel in the D.R. Horton appeal acknowledged the existence of authority supporting the proposition that bringing class actions represents “concerted activity” protected by the NLRA. 737 F.3d at 356-57. However, the court observed that to “stop here” is to erroneously make the NLRA the “only relevant authority.” Id. at 357. In proceeding to reject the NLRB’s position, the court engaged in an extensive analysis. Most importantly, however, the court concluded that the NLRA’s very general “mutual aid and protection” and “concerted activity” language is insufficiently specific to override the rights parties have under the FAA to contractually agree to litigate their disputes: (a) only in arbitration; and (b) only in their individual capacities. Id. at 357-58.
When the Ninth Circuit ultimately confronts the NLRB’s position squarely, it seems likely that it will reach the same conclusion. To the extent the NLRA right to engage in concerted activity conflicts with the right parties have under the FAA to enforce class-action waivers, the Ninth Circuit seems likely to conclude that the critical question is which of the following results would frustrate the intentions of Congress to a greater degree: (a) ruling that the FAA right identified in Concepcion does not extend to arbitration of employment-related disputes; or (b) ruling that an employee, like any other party to an arbitration agreement, can waive his right to participate in a class action. The Ninth Circuit will likely choose the second ruling, on the ground that it interferes less with the intentions of Congress.
With respect to this point, as the Supreme Court noted in Concepcion, requiring parties to arbitrate disputes on a classwide basis, even when they have previously bound themselves to arbitrate any disputes on an individual basis, fundamentally frustrates the purposes of the FAA. Conversely, as the panel of judges for the Fifth Circuit observed in the D.R. Horton appeal, the federal class-action rules did not yet exist when the NLRA was enacted. See D.R. Horton, 737 F.3d at 362. Thus, it is difficult to conclude that denying workers access to the class-action mechanism would frustrate the NLRA’s fundamental purpose of facilitating “concerted activity,” when the Congress that enacted the NLRA could not possibly have had the (not-then-existing) class-action mechanism in mind when it penned the phrase “concerted activity.” Consequently, like the judges for the Second Circuit, Fifth Circuit, and Eighth Circuit federal courts of appeal who have already considered the issue, when the Ninth Circuit ultimately considers the apparent conflict between the FAA and NLRA, it seems likely to conclude that enforcing class-action waivers in employment arbitration agreements does less to frustrate the intentions of Congress than adopting the NLRB’s position.
So, where does this leave us? Right now, in the Ninth Circuit (including Oregon), an employer can definitely hold an employee to a class-action waiver in a well-drafted and fair arbitration agreement or arbitration program if it gives the employee a thirty-day window to “opt out” and the employee does not exercise this option. The Johnmohammadi case makes this plain. Whether an employer can enforce a class-action waiver contained in an arbitration program that the employee must agree to as a condition of initial or continued employment—i.e., in a “cram-down agreement”—has not been definitively determined in the Ninth Circuit. However, the weight of authority from other jurisdictions suggests a strong likelihood (probably 70 percent or greater) that class-action waivers contained in such “cram-down” programs are enforceable within the Ninth Circuit, provided that the arbitration agreement or program is well-drafted and substantively fair to both sides in all respects.
There is one additional twist that applies to Oregon employers: an Oregon statute that says no mandatory arbitration agreement is valid unless presented to an employee at least 72 hours before his or her first day of work, or together with a significant promotion. If enforceable, this would substantially limit employers’ ability to implement mandatory arbitration programs among their existing workforces. However, after Concepcion, this statutory requirement is almost certainly invalid.
Weighing the Costs and Benefits of Implementing an Arbitration Program
As the foregoing discussion relates, a mandatory arbitration program that requires individual litigation of claims has great benefits for an employer. However, it is important to acknowledge that mandatory arbitration programs have their downsides, as well. Consequently, an employer should carefully weigh the potential costs and benefits before deciding whether to mandate arbitration of disputes pursuant to its standard employment contracts or its employee handbook. Some of those advantages and disadvantages include the following:
- Assuming enforceability, the primary advantage provided by arbitration agreements or programs containing class-action waivers is the obvious one: the avoidance of class litigation. This saves an employer both the cost of litigating complicated procedural issues, and the potential cost of liability to a whole class of plaintiffs.
- Having a sound class-action waiver provision in place also makes it far less likely that your business will be sued for alleged unpaid overtime in the first place. The economies of overtime claims are such that plaintiffs’ attorneys often have limited incentive to pursue individual claims. Simply put, class actions are where the money is. Consequently, even a plaintiffs’ attorney who truly believes (against all hope) that Concepcion does not authorize “cram-down” class-action waivers in the employment context (and that the Ninth Circuit will ultimately adopt her view) will likely prefer to pick a fight against an employer who doesn’t utilize class-action waivers. If she targets one that does, she will have to fight to have the class-action waiver invalidated before she can even begin to represent her proposed class. That is not an enticing prospect for a plaintiffs’ attorney doing a cost-benefit analysis of taking a case.
- Putting class-action concerns aside, most business-side employment law attorneys subscribe to the belief that arbitrators are more reliable and predictable decision-makers than juries. Arbitrators (many of whom are former judges) are generally perceived as less likely to be swayed by sympathy for the “underdog” (i.e., the worker) and more likely than a jury to follow the law.
- There is one major qualification to the last point above: sometimes arbitrators do make bad decisions, and, when they do, the losing party’s appeal rights are extremely limited. A party who agrees to arbitration should pretty much accept that it will probably be stuck with the arbitrator’s decision and award if it loses. It is exceptionally difficult to reverse an arbitrator’s decision on appeal, because the FAA authorizes courts to reverse arbitrators’ decisions only on very limited grounds.
- For an arbitration agreement to be enforceable, an employer probably will need to commit to paying all or most of the costs of the arbitration (e.g., the arbitrator’s fees). These can be quite expensive (although generally far less expensive than defending against a class action).
- An employer cannot rule out the worst-case scenario: litigating the enforceability of the class-action waiver in its arbitration agreement, losing, and then having to defend against a class action. This is the worst of all worlds because the employer would face, on top of the steep expense of defending the class action, the additional expenses incurred on the front end in litigating the enforceability of its agreement. For the reasons set forth above, this outcome seems unlikely if the employer has a well-drafted agreement that is substantively fair to both sides in all respects. However, if the arbitration agreement has holes or is part of a larger employment agreement that is unenforceable for any reason under Oregon’s law of contracts, the employer could be deprived of the benefits of the class-action waiver. In short, it is imperative to have a well-drafted agreement or program, and to observe sound practices with regard to how it is presented to employees. For this reason, an employer should consult with an experienced employment law attorney before implementing a program of mandatory arbitration of disputes as part of its employment policies and practices.
- As noted above, the NLRB has taken the position that the Supreme Court’s Concepcion decision does not allow class-action waivers to be enforced against employees. Although every federal appellate court that has considered the NLRB’s theory to date has rejected it, the NLRB is a very aggressive agency under the Obama administration, and it will not give up without a fight. Employers that decide to implement arbitration agreements with class-action waivers must be willing to accept some risk of becoming the subject of unwanted attention from the NLRB if an employee complains to it about the agreement. The NLRB is obviously hostile to such waivers and could conceivably pursue an “unfair labor practices” (ULP) claim against an employer that adopts them. Still, it must be noted that: (a) statistically, the chances of such a claim being filed are much lower than the chances of a class-action being filed; (b) ULP claims are generally less costly to defend; and (c) if the employer appeals an adverse NLRB decision to the Ninth Circuit Court of Appeals (admittedly an expensive proposition), the chances of persuading the court that the NLRB’s position is incorrect are quite good (for the reasons detailed above).
- A final potential disadvantage of implementing arbitration agreements has nothing to do with risk-management strategies. Depending on the type of workforce a business has, the industry of which it is part, and similar factors, implementing mandatory arbitration agreements could have a damaging effect on employee relations, workplace morale, and recruitment efforts. An employer might legitimately conclude that, given its specific circumstances, these costs outweigh the strategic benefits. Conversely, if it does go forward with implementing an arbitration program, it will obviously need to be careful, sensitive, and diplomatic in its messaging when it implements the program among its existing workforce. A good starting point is to emphasize the many benefits of arbitration for both sides.
Weighing the Costs & Benefits of an “Opt-Out” Program Versus a “Cram-Down” Program
After deciding to adopt an arbitration program, a business’s next important decision is whether to choose an “opt-out” or “cram-down” program. Each choice comes with its own advantages and costs.
The most obvious benefit of an “opt-out” program is this: a carefully drafted arbitration agreement or policy, closely modeled on the one that the court approved in the Johnmohammadi case, is definitely enforceable in Oregon if employees are given a 30-day window in which to opt out of the program. Moreover, because a panel of Ninth Circuit judges has now explicitly found class-action waivers enforceable when employees are provided such an opportunity to opt out, it is highly unlikely that a plaintiffs’ attorney, or the NLRB, would even bother trying to challenge any well-drafted class-action waiver implemented in conjunction with such an “opt-out” alternative. Thus, the principal benefit of the opt-out approach is certainty of enforceability, and the resulting elimination of any real threat of litigation over the validity of the program.
Of course, there is also an obvious downside to the opt-out approach: some employees will probably opt out. In most cases, the number of opt-outs will probably be quite small—probably no more than 20 percent in any typical workforce. Moreover, if 80 percent of the workforce is covered by the program, the employer will have effectively eliminated itself as a target for class actions, because a properly drafted class-action waiver will not only prohibit an employee from representing a class, but also from participating in a class. Therefore, to take an example, if an employee who had opted out sought to pursue an FLSA collective action to recover overtime on behalf of all his hourly wage coworkers, he would find 80 percent of his proposed “class” to be off limits. This is likely to dissuade a plaintiffs’ attorney from agreeing to take on such a representation in the first place. Thus, in a very real sense, a critical mass of participants in the arbitration program (i.e., of non-opt-outs) would effectively inoculate the employer from employment class actions.
Still, it is necessary to entertain worst-case scenarios. In this case, the worst-case scenario would consist of a particular employee who—upon receiving the opt-out form—organizes a campaign among his coworkers to opt out. If that occurred, this could conceivably change the participation numbers in a dramatic fashion, resulting in a substantial percentage of employees remaining eligible to participate in class and collective actions.
This risk will be fairly remote, in most cases. However, that it exists at all will convince many employers sold on the advantages of class-action waivers that they are better off implementing them via a “cram-down” program that makes employees’ initial and continued employment contingent on their agreement not to lead or participate in employment class actions. This approach increases the risk of litigation substantially, because the Ninth Circuit has not explicitly approved the use of class-action waivers in such “cram-down” programs, and the NLRB and some plaintiffs’ attorneys may therefore still be inclined to challenge their validity in Oregon. However, for the reasons detailed above, there is a high likelihood that the Ninth Circuit will ultimately conclude that “cram-down” class-action waivers are enforceable, too.
Implementing an arbitration program with a class-action waiver provision is not without costs. However, for many employers big enough to be viewed as lucrative targets for plaintiffs’ attorneys, they represent a sound option for mitigating the risks associated with overtime class actions.
Dan Webb Howard is an employment attorney and appellate practitioner with the law firm of Gleaves Swearingen LLP in Eugene, Oregon. If you have any questions relating to this article, you can reach him at email@example.com
DISCLAIMER: The information in this article is offered for general information and educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship. You should not act on the information in this article before seeking the advice of an attorney.