Arbitration agreements between employers and employees are very common. As of 2018, an Economic Policy Institute poll estimated that 56% of private-sector, non-union employees were subject to such agreements. Based on recent developments in arbitration law, that figure has surely risen. Arbitration of employee disputes can carry with it certain advantages. Perhaps the primary reason that companies have arbitration agreements with their employees is because, unless such agreements are drafted specifically to include class or collective arbitration, they preclude class or collective treatment of claims. See Lamps Plus v. Varela, 139 S. Ct. 1407, 1419 (2019). A properly drafted and executed arbitration agreement governed by the Federal Arbitration Act (FAA) is a powerful defense to employment-related collective or class actions.
However, outside of its class-busting properties, arbitration can be a mixed bag for employers. Arbitrations typically require much heftier filing fees than do courts and require paying fees directly to the arbitration administrator and the arbitrator. Many employers have found that summary disposition of cases can be more difficult to come by in arbitration, as compared to, for example, federal district court. Add to this limited rights to appeal, the perception (right or wrong) that arbitrators sometimes “split the baby,” and employers may wonder if there are alternatives to arbitrating all of their employment disputes. Could an employer and its employee, for instance, agree to arbitrate only those claims that pose a threat of class or collective treatment? Or, alternatively, does an employer need arbitration at all? Is it possible to agree with an employee to waive proceeding as a representative or participant in a class or collective action without also agreeing to arbitrate?
Waiver of Collective or Class Actions in Arbitration
In a series of cases, the U.S. Supreme Court has clarified that arbitration agreements governed by the FAA will be enforced in the employment context and can be relied upon to prohibit class and collective actions. In Circuit City v. Adams, the Court held that, other than a narrow exception for transportation workers, employment contracts are not excluded from the reach of the FAA. See 532 U.S. 105, 119 (2001). Although substantive rights, such as the right to minimum wage and overtime under the Fair Labor Standards Act (FLSA), cannot be waived—see Brooklyn Savings Bank v. O’Neil, 324 U.S. 697, 706–10 (1945)—there is no waiver of substantive rights by agreeing to the arbitral forum. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 628 (1985). Plaintiffs who arbitrate under the FAA may not arbitrate collectively or as a class, unless expressly provided for by the arbitration agreement. See Stolt-Nielsen S.A. v. AnimalFeeds International, 559 U.S. 662, 685-87 (2010). We also know from AT&T Mobility v. Concepcion that the FAA preempts state laws that do not allow for waiver of class actions on grounds of unconscionability. Finally, Epic Systems v. Lewis decided that the federal law protecting employees’ rights to protected concerted activity is no obstacle to enforcing an arbitration agreement that prohibits collective or class action procedures under the FAA.
Can Employers Limit the Claims That Will Be Arbitrated?
Because the right to compel an individual arbitration under the FAA is so well-defined, and because the FAA will preempt contrary state laws, employers may be well served to include in their employment agreements both a class and collective action waiver and an agreement to arbitrate. But does that mean that the employer must agree to arbitrate any and all disputes with its employee? Nothing in the FAA suggests that it does. In fact, case law from the Supreme Court interpreting the FAA makes it quite clear that parties to an arbitration agreement may elect to arbitrate some claims but not others. In fact, where a dispute involves some claims that are subject to an arbitration agreement and some claims that are not, the court commits error by retaining on its docket those matters that are subject to arbitration, though doing so might be more efficient, avoid inconsistent judgments, and the like. See KPMG LLP v. Cocchi, 568 U.S. 18, 19 (2011). It is worth noting that an agreement that makes some employment claims subject to arbitration, but not others, would pose a risk of inconsistent rulings, as well as possible issue preclusion—though whether preclusion would apply in a given case will depend upon the particular facts and the particular judge deciding the issue (E.g., Universal Am. Barge Corp. v. J-Chem, Inc., 946 F.2d 1131, 1137 (5th Cir. 1991)). The risk of issue preclusion can certainly be dealt with on the front end by motions to stay one proceeding or the other.
Can Employers Rely on Class/Collective Waivers?
There may also be considerations, such as employee resistance to entering into arbitration agreements, previous bad experiences, or the like, that lead employers to consider entering into agreements that do not require arbitration at all, but only class and collective action waivers. But would such agreements be enforceable without the benefit of case law favoring arbitration? In many jurisdictions, a stand-alone waiver could be effective, depending upon the claim being waived and the way in which the waiver is drafted and presented.
The U.S. Court of Appeals for the Fifth Circuit has held that the right to proceed collectively under the FLSA is procedural, not substantive, in nature. See Carter v. Countrywide Credit Industries, 362 F.3d 294, 298 (5th Cir. 2004). Relying on this holding, courts in Texas have held that it is possible to waive the right to proceed collectively under the FLSA, even without the benefit of an arbitration agreement. See Serrano v. Globe Energy Services, LLC, No. MO:15-CV-00170-RAJ, 2016 (W.D. Tex. Mar. 3, 2016); see also Mazurkiewicz v. Clayton Homes, Inc., 971 F. Supp. 2d 682, 692 (S.D. Tex. 2013). The Fifth Circuit has also held that collective and class action waivers do not violate the NLRA—a result that was confirmed recently by the Supreme Court in Epic Systems. See Convergys v. National Labor Relations Board, 866 F.3d 635, 640 (5th Cir. 2017).
Other jurisdictions, however, may come to different conclusions. For instance, in the context of the FLSA, the Sixth Circuit has held that class and collective action waivers outside of arbitration agreements are not valid because the FLSA calls for a collective procedure, and “no countervailing federal policy outweighs the policy articulated in the FLSA.” See Killion v. KeHE Distributors, LLC, 761 F.3d 574, 592 (6th Cir. 2014). Thus, employers in Michigan, Ohio, Tennessee and Kentucky will need to wrap their collective and class waivers in arbitration agreements to ensure enforceability.
But even an arbitration agreement may not protect the class waiver from attack if the arbitration agreement is not subject to the FAA. For instance, at least one California court has held that where the California Arbitration Act—not the FAA—applies, waiver of the right to proceed collectively renders an arbitration agreement unconscionable. See Garrido v. Air Liquide Industrial U.S. LP, No. B254490, 2015 WL 6451011 (Cal. Ct. App., Oct. 26, 2015). Unconscionability and other contract defenses remain a potent tool for plaintiffs to avoid class and collective action waivers in certain jurisdictions. Care should be exercised to examine the law in each jurisdiction where the waiver will be relied upon.
Remember the Texas Arbitration Act
One feature of the FAA that many employers have learned about the hard way is that appellate rights under the statute are very limited. See 9 U.S.C. §§ 10, 11. Not only that, the parties may not create appellate rights by agreement. See Hall Street Associates v. Mattel, 522 U.S. 576, 584 (2008). The Texas Supreme Court has held, however, that under the Texas Arbitration Act (TAA) (Tex. Civ. Prac. & Rem. Code § 171.001, et seq.), parties may create the right to appeal by limiting the arbitrator’s power to enter an award that is contrary to law or that would not survive appeal if it were the judgment of a trial court. See Nafta Traders v. Quinn, 339 S.W.3d 84, 95-97 (Tex. 2011). Thus, an agreement appropriately drafted to avoid application of the FAA in favor of the TAA could include rights to appeal an erroneous decision or award by an arbitrator.
Tailoring the Agreement
Finally, employers should remember that their arbitration agreements allow the parties to select, with as much specificity as they would like, what procedures will be used in the arbitration. The parties could elect, for instance, to have a tiered structure with access to discovery increasing as the dollar amount at issue increases. The opportunities to tailor the procedure are almost limitless, yet most arbitration agreements simply adopt the rules of the AAA or JAMS, without more. Arbitration agreements present an opportunity to truly streamline dispute resolution, but it should be approached thoughtfully and in light of the ever-changing legal authorities surrounding it.
Travis J. Odom practices in the area of employment and labor law, representing and counseling clients in matters under state and federal law, including unfair competition and trade secrets, discrimination, harassment, retaliation, wage and hour claims, workplace safety, unemployment benefits, agreements, best practices and other areas.
Mr. Odom is a 2006 cum laude graduate of Baylor Law School, where he was senior editor of the Baylor Law Review, and a graduate of Baylor University. Prior to entering private practice, he served as a briefing attorney to the Hon. Wanda McKee Fowler, Justice of the Texas 14th District Court of Appeals.
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