An EPIC Day for Employers Utilizing Arbitration Agreements

The United States Supreme Court recently issued a decision in Epic Systems Corporation v. Lewis, – S. Ct. –, 2018 WL 2292444 (2018) resolving a circuit split in favor of upholding employers’ ability to enforce arbitration agreements with employees requiring individualized proceedings.

In each of the underlying consolidated cases below, employees sought to litigate Fair Labor Standards Act (“FLSA”) and state law wage and hour claims on a collective action and Rule 23 class action basis, despite being parties to an arbitration agreement with their respective employers mandating arbitration of all claims on an individualized basis. The employees argued to the Court that such arbitration provisions violated the National Labor Relations Act (“NLRA”), and as such, courts need not enforce the arbitration provisions under the savings clause of the Federal Arbitration Act (“FAA”).

The five justice majority, in an opinion authored by Justice Gorsuch, rejected these arguments. First, the majority noted that the FAA’s savings clause only precludes enforcement of arbitration agreements that are invalid “upon such grounds as exist at law or equity for the revocation of any contract.” 9 U.S.C. § 2. Even if the provisions were illegal under the NLRA, the majority found that the savings clause would be inapplicable because this was not the type of generally applicable defense—such as fraud, duress, or unconscionability—that would apply to any contract. Second, the majority held that, contrary to the employees’ position, the NLRA did not invalidate the agreement because it does not speak to class or collective actions, and the more specific statutes (such as the FLSA) do not proscribe individualized arbitrations. Finally, the majority held that the National Labor Relations Board was not due Chevron deference because it was seeking to interpret the FAA, a statute outside its administrative authority, and because the government was taking inconsistent positions through the Board and the Solicitor General.

Impact on Employers

Does this mean that employers are free to implement or continue to use arbitration agreements requiring individualized arbitration for employment issues? While the Epic decision certainly eliminates the previous uncertainty around the use of arbitration to resolve employment disputes filed on a class or collective basis, there are still a number of factors that employers should consider if they are considering implementing or have already implemented an arbitration program in their workplace:

Contract Based Arguments: Justice Gorsuch’s opinion left open the door for arguments that an arbitration agreement need not be enforced under the FAA due to violations of generally applicable contract defenses such as fraud, duress, or unconscionability. While these are not new defenses to enforcement of an arbitration agreement, the Epic opinion highlights the need for employers to carefully consider and draft arbitration provisions to minimize the potential for such arguments.

Costs: Enforcement of arbitration on an individualized basis can still result in multiple, sometimes expensive individual arbitrations. The costs of arbitration vary substantially between employers and employees under different association rules, with employers often bearing a significantly greater portion of the filing and administrative fees. Employers should carefully consider not only the potential costs and fees of arbitration but also whether certain types of employment issues may be more cost effective to litigate or to arbitrate on a class-wide or consolidated basis.

Legislation: Though not directly related to the Epic decision, as employers consider their arbitration agreements, it is important to note that in the wake of the #MeToo movement, several state legislatures have taken steps to limit arbitration for sexual harassment claims and although similar legislation is currently stalled in Congress, that could change after the upcoming midterm elections. Certain federal contractors may also be subject to limits on the use of arbitration to resolve certain workplace claims, including sexual harassment and sexual assault.

Executive Orders: In response to the Epic decision, Governor Inslee of Washington issued Executive Order 18-03 which requires state agencies to give preference in contracting to companies that do not require employees to sign mandatory individual arbitration clauses or class or collective action waivers. It is possible that other states may follow suit.

The Bottom Line 

The Epic decision is definitely a “win” for employers who utilize arbitration agreements and may face wage and hour or other claims that are often brought on a class or collective basis.  As for the “what next”—employers who do not have arbitration agreements should consider post-Epic whether arbitration is an appropriate and cost-effective dispute resolution tool for their workplace, especially if they are vulnerable to class or collective action claims. For employers with arbitration agreements already in place, the Epic decision serves as a reminder (i) to consider inclusion of class waiver language if it is not currently part of their arbitration agreement, and (ii) to review the actual language and scope of their arbitration agreements to minimize other challenges to enforcement that may be pursued post-Epic as well as compliance with other recently-enacted laws.