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.

By Marisa S. Ratinoff and Amy B. Messigian

One of the main battlegrounds between employers and employees relates to the ability of employers to preclude class actions by way of arbitration agreements containing class action waivers. In California, the seminal case of Gentry v. Superior Court (“Gentry”) has had the practical effect of invalidating class action waivers in employment arbitration agreements since 2007. Gentry held that an employment class action waiver was unenforceable as a matter of California public policy if the class action waiver would “undermine the vindication of the employees’ unwaivable statutory rights” under the Labor Code. Thus, California financial services employers and national financial services employers with a business presence in California have found it extremely difficult, if not impossible, to enforce class action waivers in their employment arbitration agreements over the past seven years and have seen scores of California wage and hour cases proceed in court under the harsh hand of Gentry.

The landscape changed drastically in 2010 when the United States Supreme Court issued its decision in AT&T Mobility, LLC v. Concepcion (“Concepcion”). There, the Supreme Court held that the Federal Arbitration Act (“FAA”) preempts state laws or policies that deem arbitration agreements unconscionable and unenforceable on the basis that they preclude class actions. While the Concepcion case related to a consumer arbitration agreement, many have questioned whether its impact extended to employment arbitration agreements, such as the ones invalidated on public policy grounds under Gentry.

Iskanian v. CLS Transportation Los Angeles, LLC is the first case to test this issue before the California Supreme Court. The decision takes one step forward and one step back. First, the Court held that Gentry has been abrogated by Concepcion. As such, courts may not refuse to enforce an employment arbitration agreement simply because it contains a class action waiver. The Court further rejected the argument that a class action waiver is unlawful under the National Labor Relations Act.

However, the Court also found that an employee’s right to bring a representative action under Private Attorney General Act (“PAGA”) is nonwaivable. Under PAGA, an employee may bring a civil action personally and on behalf of other current or former employees to recover civil penalties for Labor Code violations. Of the civil penalties recovered, 75 percent goes to the State of California and the remaining 25 percent go to the “aggrieved employees.” The Court held that “an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy.” The Court also found that “the FAA’s goal of promoting arbitration as a means of private dispute resolution does not preclude [California’s] Legislature from deputizing employees to prosecute Labor Code violations on the state’s behalf.” The Court explained that PAGA waivers do not frustrate the FAA’s objectives because the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the State, which is being brought in a representative capacity by the employee. Because the State derives the majority of the benefit of the claim and any judgment is binding on the government, it is the “real party in interest,” making a PAGA claim more akin to a law enforcement action than a private dispute. Because of this, it is within California’s police powers to enact PAGA and prevent the waiver of representative PAGA claims.

The practical effect is that even if a class action waiver is enforceable, any purported waiver of a representative PAGA action will be unenforceable. As a result, a complaint filed in court that includes a PAGA cause of action will arguably remain with the court unless the claims are bifurcated. As for Iskanian and his former employer, the Court left these questions to the parties to resolve. While it is possible that Iskanian will be appealed to the United States Supreme Court for guidance, at least for the foreseeable future employers should expect plaintiffs’ counsel to include PAGA causes of action in order to frustrate employer efforts to move wage and hour claims to arbitration.

Going forward, financial services employers may want to consider adopting agreements with their California employees that expressly permit representative PAGA claims to be brought in arbitration while waiving all other class claims to the extent allowed by law. Alternatively, employers may revise their agreements to allow for bifurcation of claims or expressly exclude PAGA claims from the scope of the agreement. In either case, employers should use this opportunity to review the terms of their arbitration agreements and put new agreements in place with California employees, if necessary.