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.

Once again seemingly appropriate work rules have been under attack by the National Labor Relations Board (“NLRB”). In a recent decision (Component Bar Products, Inc. and James R. Stout, Case 14-CA-145064), two members of a three-member NLRB panel upheld an August 7, 2015 decision by an Administrative Law Judge (“ALJ”) finding that an employer violated the National Labor Relations Act (“NLRA” or the “Act”) by maintaining overly broad handbook rules and terminating an employee who was engaged in “protected, concerted activity” when he called another employee and warned him that his job was in jeopardy.  Member Miscimarra concurred in part and dissented in part, arguing that the Board should overrule applicable precedent interpreting the Act.

Factual background

The respondent company is engaged in the manufacture and sale of precision machined products for the automotive and other industries from a facility in Missouri. Respondent maintained a personal conduct and disciplinary action policy in its associate handbook that prohibits “insubordination or other disrespectful conduct,” “unauthorized disclosure of business ‘secrets’ or confidential information,” and “boisterous or disruptive activity in the workplace.”  On January 20, 2015, a quality technician called his co-worker from his cell phone during business hours after his Plant Manager made a remark suggesting that the co-worker may not have a job with the company anymore.  The Plant Manager found out about the technician’s phone call when the co-worker called the Respondent to complain that it was management’s job, not an employee’s job, to tell him that he was being fired.  Respondent decided to terminate the technician for “misconduct” for involving himself in another employee’s personal affairs and otherwise engaging in conduct in violation of the handbook.

The ALJ’s Decision

The ALJ first considered whether the Respondent’s maintenance of rules prohibiting “insubordination and other disrespectful conduct” and “boisterous or disruptive activity in the workplace” violates Section 8(a)(1) of the Act because employees reasonably could construe those bans to include protected Section 7 activity. Citing NLRB precedent (Lutheran Heritage Village-Livonia, 343 NLRB 646 (2004)), the ALJ noted that an employer violates Section 8(a)(1) when it maintains a work rule that employees could “reasonably construe” to block or “chill” them from exercising their Section 7 rights.  In this case, the ALJ determined that both rules in the handbook violate Section 8(a)(1) because of their likelihood to chill Section 7 activity.

The ALJ next considered whether the discharge of the technician was proper or whether it violated Section 7 of the Act, which protects employee conduct that is both “concerted” and engaged in “for mutual aid and protection.” Because the Board repeatedly has held that an employee’s warning to another employee that the latter’s job is at risk constitutes protected, concerted activity, the ALJ found that the technician’s conversation with the co-worker constituted protected, concerted activity.  Accordingly, the ALJ found that the technician’s discharge violated Section 8(a)(1) because he was terminated for engaging in such conduct.

Among other things, the ALJ ordered the Respondent to offer the technician full reinstatement to his former position or, if that position no longer exists, to a substantially equivalent position, without prejudice to his seniority or any other rights or privileges previously enjoyed, and to make him whole for any loss of earnings and other benefits suffered as a result of the discrimination against him. The ALJ also said that the employer should compensate him for adverse tax consequences, if any, of receiving a lump-sum backpay award and to file a report with the Social Security Administration allocating the backpay award to appropriate calendar quarters.

The Panel’s Decision

The Board majority agreed with the ALJ’s application of Lutheran Village to find that the Respondent violated Section 8(a)(1) by maintaining overly broad handbook rules and that the technician engaged in protected concerted activity when he called another employee to warn the employee that his job was in jeopardy and the Respondent violated Section 8(a)(1) by discharging the technician for that activity.  The majority said, “We agree with the judge’s application of Lutheran Heritage … to find that the respondent violated Section 8(a)(1) by maintaining overly broad handbook rules. . . . We also agree with the judge that [the technician] engaged in protected concerted activity.” The panel also agreed with the ALJ that the technician should be awarded backpay in the form of a lump sum, but disagreed with the ALJ as to how the Respondent must report and allocate that payment.

Member Miscimarra’s Concurring and Dissenting Opinion

Member Miscimarra concurred with the majority’s finding that the technician engaged in protected concerted activity when he telephoned his coworker to warn him that his job was in jeopardy, and he agreed that the Respondent violated Section 8(a)(1) of the Act when it discharged the technician for doing so. However, regarding the majority’s finding that the Respondent violated Section 8(a)(1) by maintaining the two work rules, Miscimarra disagreed with those violation findings, and he also disagreed with the standard that the ALJ and the majority applied in reaching those findings:  he said, “Unlike my colleagues and the judge, I believe the Board should not apply the ‘reasonably construe’ standard [from Lutheran Village].”

Miscimarra said that he believes the Lutheran Heritage ‘reasonably construe’ standard should be overruled by the Board or repudiated by the courts.

Instead, Member Miscimarra endorsed the standard he articulated in the NLRB’s decision William Beaumont Hospital, 363 NLRB No. 162, slip op. at 7–24 (2016) (Member Miscimarra, concurring in part and dissenting in part).  In William Beaumont, he articulated his view that the Board is required to evaluate an employer’s workplace rules, policies and handbook provisions by striking a “proper balance” that takes into account (i) the legitimate justifications associated with the disputed rules and (ii) any potential adverse impact on NLRA protected activity, and a “facially neutral” policy, rule or handbook provision (defined as a rule that does not expressly restrict Section 7 activity, was not adopted in response to NLRA-protected activity, and has not been applied to restrict NLRA-protected activity) should be declared unlawful only if the legitimate justifications an employer may have for maintaining the rule are outweighed by its potential adverse impact on Section 7 activity.  Applying that standard, Member Miscimarra said that the Board should find that the two rules at issue are lawful.

Conclusion

Notwithstanding Member Miscimara’s dissenting opinion, Lutheran Village remains viable NLRB precedent, as evidenced by the majority’s application of that decision.  Accordingly, this case is yet another example of the NLRB’s broad view of what constitutes “concerted protected activity,” “work rules” and unlawful activity under the Act. Because what constitutes an overbroad work rule is not always clear-cut, any employer subject to the Act (one whose company affects commerce) should carefully review its various agreements, policies and handbooks to ensure that they do not contain rules that would not be reasonably construed to chill union-related activities. While there are swirling questions on how aggressive the future NLRB will be under a new administration, in the meantime, taking a proactive approach of revising potentially problematic work rules will put employers in the best possible position if they find themselves facing scrutiny from the NLRB.