In May, the U.S. Supreme Court ruled in Epic Systems Corp. v. Lewis that employers may lawfully require employees to sign arbitration agreements that include a waiver of the right to participate in an employee class action lawsuit or arbitration. Below, we discuss the significance of this decision and highlight issues that employers may wish to consider in the wake of it.

Epic Systems—a Pivotal Win for Employers

The NLRB planted the seed for Epic Systems in 2012, when it first took the position that Section 7 of the National Labor relations Act (“NLRA”)—which affords employees the right to self-organize, bargain collectively, and “engage in other concerted activities”—precludes enforcement of employee class action waivers. The federal Circuit Courts of Appeal split on the NLRB’s position in the ensuing years. Deepening the divide, the DOJ under the current administration broke with the NLRB.

In Epic Systems the Supreme Court rejected the notion that class actions are “concerted activities” inviolable under Section 7 of the NLRA, opining that the term is not a broad catchall. The Court observed that, while the NLRA includes many specific procedural rules, rules relating to class or collective actions are not among them. Absent clear Congressional intent, the Court reasoned that the NLRA could not “displace” the Federal Arbitration Act (“FAA”) and its edict promoting the enforceability of arbitration agreements.

Further, even if the employees could show that “the NLRA actually renders class and collective action waivers illegal[,]” the Court stated that the employees still could not properly invoke the FAA’s “saving” clause, which permits annulment of arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” The Court characterized this as an “‘equal-treatment’ rule for arbitration contracts”—i.e., an arbitration contract (including a class action waiver) will be nullified only if it suffers from an elemental flaw in its formation, such as fraud.

In sum, Epic Systems represents a continuation of the Supreme Court’s recent trend of favoring arbitration agreements.

What Employers Should Consider Next

Though Epic Systems marks a resonant victory for employers, issues around the scope and effectiveness of class action waivers remain. Financial services employers may wish to consider:

Can our firm implement a class action waiver?

In implementing waivers, the financial services sector must be mindful of FINRA’s regulatory authority. Though any doubt about the lawfulness of consumer class action waivers was erased in 2011, FINRA has since said that a member firm’s use of waivers in customer contracts violates FINRA’s rules “intended to preserve investor access to . . . judicial class actions[.]”

FINRA has not, however, announced a parallel prohibition on waivers in employment agreements. Indeed, the Second Circuit Court of Appeals in 2015 held that FINRA’s arbitral rules—though they preclude arbitration of claims subject to class actions and certain types of collective actions—do not bar employers from enforcing employee waivers.

Should our firm implement a class action waiver?

Although Epic Systems confirms that employers may require employees to waive the right to participate in a class actions, employers still must consider the practical implications. The environment around arbitration agreements and class action waivers is politically-charged, and firms implementing a class action waiver may receive backlash from employees and advocacy groups. Accordingly, any program rollout should be given due consideration.

What is the appropriate vehicle for the waiver?

A class action waiver may be included in an employment policy made available to—and acknowledged indirectly by—employees, or it could be included in a specific agreement that itself requires an employee’s signature.   The former may be an easier rollout, but the latter could be less susceptible to a claim that the employee(s) never agreed to the waiver.

Employers also should note that, although Epic Systems addressed class action waivers in the context of arbitration agreements, a class action waiver could also appear in an agreement that permits the parties to choose litigation instead of arbitration, if that is the preference.

To whom will the waiver apply?

Employers should consider whether a waiver will apply to all or some employees. Conditioning a new hire’s employment on a waiver could be fairly straightforward, but rolling out a new requirement to current employees might be more difficult from a practical and legal perspective. As noted in Epic Systems, arbitration agreements (and concomitant waivers) may be nullified under the FAA on fundamental grounds—including, potentially, a lack of “consideration” given in exchange for the waiver. Hence, employers might consider presenting existing employees with waivers in connection with a raise, bonus, promotion, etc.

What form should the waiver take?

Class action waivers should be as simple and concise as possible. Ambiguity may open the door to an adverse interpretation by a court or arbitral panel skeptical of waivers as a general matter. Epic Systems does not offer much guidance in this regard, but various trial and appellate court opinions do.

Might any class or collection actions be outside the scope of even a well-drafted a waiver?

Lastly, even a well-crafted class action waiver may not fully insulate employers. In this vein, the financial services sector—with its nucleus in New York—should keep an eye on a bill introduced in the New York State legislature, the “Empowering People in Rights Enforcement (EMPIRE) Worker Protection Act” (“EWPA”). It would amend New York’s Labor Law such that complainant employee(s) could step into NYSDOL’s shoes and pursue civil penalties “on behalf of . . . other current or former employees” and “allege multiple violations that have affected different employees.” If passed, employees could attempt to use the EWPA as an end-run around class action waivers. Employees may contend that, as NYSDOL itself is not bound by a contractual waiver, employee(s) cloaked with NYSDOL’s authority likewise would be unhindered by that waiver. Employees have made essentially that argument, with success thus far, in relation to California’s Private Attorneys General Act (“PAGA”), after which the EWPA is modeled.

When the Supreme Court held in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013),  that the Federal Arbitration Act does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery, many employers in the financial services industry, if they had not done so already, strengthened the language of  their mandatory arbitration provisions and policies to include explicit class action and class arbitration waivers.  Notwithstanding the American Express decision and earlier Supreme Court decisions that have paved the way for the enforceability of contractual class action waivers, however, the National Labor Relations Board has been saying, in essence, “not so fast.”

On Epstein Becker Green’s Management Memo blog, my colleague Jill Barbarino reviews the National Labor Relations Board’s ruling in Murphy Oil that revisited and reaffirmed its position that employers violate the National Labor Relations Act by requiring employees covered by the Act (virtually all nonsupervisory and non-managerial employees of most private sector employees, whether unionized or not) to waive, as a condition of their employment, participation in class or collective actions.

Click here to read the Management memo blog post in its entirety.

By:  John F. Fullerton III

The Second Circuit has given class action waivers another shot in the arm.  In Parisi v. Goldman, Sachs & Co. (pdf), plaintiff argued that because she had agreed to arbitrate statutory employment discrimination claims against her employer, but could not proceed in a class-wide arbitration, she must be permitted to pursue her Title VII pattern-or-practice sex discrimination claim as a class action plaintiff in court; otherwise, her arbitration agreement would constitute an impermissible waiver of a substantive statutory right.   The Court firmly rejected this argument, holding that there is no substantive statutory right to pursue a pattern-or-practice claim in court.  The Court reversed the lower court’s ruling that had refused to compel arbitration of plaintiff’s claim individually.

When plaintiff was promoted to managing director, she signed an agreement that included a mandatory arbitration clause.  She was required to pursue “any dispute, controversy or claim arising out of or based upon or relating to Employment Related Matters,” which included Title VII discrimination claims, before NYSE or NASD (the predecessors of FINRA Dispute Resolution), or, if they declined to administer the case, before the American Arbitration Association.  The agreement was silent, however, regarding the possibility of proceeding in a class-wide arbitration.  Because the Supreme Court subsequently held in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., (pdf) that a party cannot be compelled to arbitrate on a class-wide basis unless it has expressly agreed to do so, and the arbitration provision in question was silent on that issue, plaintiff argued, and the lower court agreed, that “the agreement’s preclusion of class arbitration would make it impossible for Paris to arbitrate a Title VII pattern-or-practice claim, and that consequently, the clause effectively operated as a waiver of a substantive right under Title VII.”

The Second Circuit reversed.  Relying on previous Second Circuit case law, the Court noted that “in Title VII jurisprudence ‘pattern-or-practice’ simply refers to a method of proof and does not constitute a ‘freestanding cause of action.’”  Further, because Fed. R. Civ. P. 23, which governs federal class actions, is only a procedural vehicle “ancillary to the litigation of substantive claims,” the undisputed fact that private, non-governmental plaintiffs do not have a substantive a right to bring individual pattern-or-practice claims in court means that there is “no entitlement to the ancillary class action procedural mechanism.”

The decision is another great outcome in favor of class action waivers.  (We recently reported here, for example, that a FINRA disciplinary hearing panel permitted Charles Schwab & Company, Inc. to maintain its predispute arbitration provision in its customer agreement that includes a class action waiver).   It also sets the stage for the Supreme Court’s pending decision in American Express Company v. Italian Colors Restaurant, which, reviewing another Second Circuit decision, will decide whether the Federal Arbitration Act permits courts, invoking the “federal substantive law of arbitrability,” to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal law claim.  Depending on the outcome of that decision, expected before the end of the current term in June, we could see a dramatic increase in the use of class action waivers in both the employment and consumer context.