US Supreme Court upholds arbitration agreements with class action waivers

By Paige Good

Yesterday, Justice Gorsuch for the United States Supreme Court issued an opinion in Epic Systems Corp v. Lewis, together with two companion cases, upholding the use of class and collective action waivers in arbitration agreements by employers.

At issue in this trio of Supreme Court cases was whether employees and employers should be allowed to enter into agreements requiring that disputes between them be resolved through one-on-one arbitration. If these types of agreements are allowed, employees are effectively prohibited from banding together to assert claims in a class action, a collective action, or even a multi-employee arbitration. These types of proceedings are useful tools for individuals alleging “low dollar” violations – including violations of wage and hour laws. By banding together, collective liability increases, the employer’s risk increases, and, frankly, the matters become more attractive to plaintiffs’ lawyers. These decisions have been greatly anticipated because they have a tremendous impact for employers that have been including class and collective action waivers in their arbitration agreements with employees, especially in response to the recent surge of wage and hour claims under the Fair Labor Standards Act (FLSA).

The Court considered the impact of the Federal Arbitration Act, enacted in 1925. In ruling in favor of employers, the Court emphasized the policy behind the Federal Arbitration Act, wherein Congress has instructed federal courts to enforce arbitration agreements according to their terms – including specified terms waiving class or collective proceedings. Indeed, not only did the Court highlight the “liberal federal policy favoring arbitration agreements,” but also the Arbitration Act’s intention to allow the parties to determine the specific terms under which they will arbitrate.

The Court found that the Arbitration Act did not negate the parties’ ability to waive class and collective actions in arbitration. The Court clarified that arbitration agreements may only be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” and not simply because they require individualized arbitration proceedings.

The Court also held that the National Labor Relations Act (NLRA) did not require a different outcome. The NLRA guarantees workers the right to self-organize and to engage in other “concerted activities” to improve their working conditions. Employees argued that arbitration agreements with class waivers violate the NLRA’s mandate. The high court disagreed, stating that the NLRA neither approves nor disapproves of arbitration, does not address class or collective action procedures, and “does not even hint at a wish to displace the Arbitration Act.”

Finally, the Court addressed whether the right to a collective action guaranteed by the FLSA somehow “trumps” the Arbitration Act or otherwise prohibits individualized arbitration proceedings. Its answer? No. The FLSA allows agreements for individualized arbitration.

Based on the Court’s ruling, it is now clear that employers and employees may enter into arbitration agreements containing class and collective action waivers that require any arbitration proceedings for the resolution of employment disputes to proceed on an individualized basis.

Next steps for employers with arbitration agreements

Employers that use arbitration agreements should review those agreements to determine whether they already include class and collective action waivers. If they do not, consider incorporating them.

Businesses should also assess whether their arbitration agreements cover the full spectrum of employment disputes that may arise. If the employee wishes to bring a claim not specifically addressed in his or her arbitration agreement, the employee may be able to bypass mandatory arbitration.

Also keep in mind that arbitration agreements can be challenged and found unenforceable for a variety of other reasons. In order to take full advantage of arbitration agreements, including class and collective action waivers, such agreements must satisfy a variety of requirements. For example, an arbitration agreement may be considered “unconscionable” if it requires the employee to pay a substantial portion of arbitration fees. Some state laws allow arbitration agreements to be signed during the course of an employee’s employment (rather than at the commencement of employment), while other states require an employee to receive some other benefit or sum in addition to continued employment. Different states have different rules governing what makes a contract, including an arbitration agreement, valid. Employers must ensure their arbitration agreements are valid and enforceable under applicable state law(s), in order to take full advantage of any class and collective action waiver.

Mandatory arbitration agreements with at-will employees certainly have some advantages for many employers, but not all. To examine whether arbitration agreements would be valuable given your circumstances, contact your employment lawyer at McAfee & Taft.

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