James R. Grasso, Co-Author Article

Class Action Waivers and Mandatory Arbitration Agreements

In July of this year, the United States Supreme Court issued its opinion in Epic Systems Corp. v. Lewis in which it held that employers may enforce mandatory arbitration agreements that require employees to bring employment-related claims against their employer in individual arbitrations instead of court, and to waive the right to bring or participate in a class action. The ruling is significant for employers because it gives them the ability to effectively prohibit employees from bringing or participating in class or collective actions against them, and thereby avoid the risks and outsized costs associated with class and collective actions. However, before deciding to do so, employers should understand the arbitration process, its benefits and limitations, and the issues involved in designing and implementing a mandatory arbitration agreement.

Arbitration is an alternative dispute resolution process in which the parties’ dispute is heard and decided outside of court by one or more disinterested arbitrators chosen by the parties. Arbitrators are usually attorneys with significant experience in the area of law at issue. Thus, arbitration allows the parties to decide who will hear and decide their dispute and avoids having juries, which are generally considered more likely to be swayed by sympathy and award excessive damages. Arbitration is also confidential, conducted in private and not open to the public, thereby minimizing publicity, making it less formal than court litigation and more accommodating of the parties’ schedules. An employer may also set forth in the arbitration agreement the procedural and evidentiary rules that will be used in arbitration, so long as they provide adequate due process.

Mandatory employment arbitration, though, is not without its limitations – the largest being cost. Arbitration is typically less costly because it is faster and less formal than court litigation. But, in the context of employment arbitration, the Supreme Court has also held that employees may not be required to pay “prohibitive” costs to pursue their federal employment rights outside of court. In practice, this means that employers must bear the entire cost of arbitration, including filing and administrative fees and the arbitrator’s fee, which alone can run into tens of thousands of dollars. Arbitration awards are also usually final and binding and cannot be appealed in court, except upon very limited grounds. However, the agreement can provide for an arbitral appeal process on the same grounds that would be available if the matter were heard in court. Additionally, arbitration will not avoid investigations and proceedings brought by state and federal agencies. Employees who sign an arbitration agreement retain the right to file complaints with and assist government agencies.

Despite its limitations, the benefits of avoiding class and collective actions may, in light of an employer’s situation – including its size, litigation experience and potential exposure in a class or collective action – make it worthwhile to implement mandatory arbitration. Employers can also lessen many arbitration limitations in the design of the arbitration agreement. For example, the agreement can be written to cover only substantive claims, such as those alleging a violation of law, to avoid having to arbitrate a violation of a handbook policy or other trivial claim. (Certain claims cannot be arbitrated as a matter of law, such as workers’ compensation and unemployment claims.) Arbitration can be made optional at the request of either party. In such cases, the agreement would still be mandatory in the sense that it would be a condition of employment. Thus, if an employee were to bring an individual claim in court, which is usually the preference of employees and certainly their attorneys, the employer could allow it to stay in court and thereby avoid paying for arbitration. Meanwhile, the employer would retain the ability to avoid class and collective actions by invoking the individual arbitration requirement in response to any class or collective action.

The issues discussed above are only a few of those that should be considered when deciding whether to implement mandatory employment arbitration. Doing so successfully requires careful planning and coordination with experienced legal counsel.

James R. Grasso is a partner with Phillips Lytle LLP and a member of the Labor & Employment Practice Team. He concentrates his practice in counseling and representing management in all areas of labor and employment law and litigation. He can be reached at jgrasso@phillipslytle.com or (716) 847-5422.

Joanna J. Chen is a senior associate with Phillips Lytle LLP and a member of the Labor & Employment Practice Team. She has experience in counseling private and public entities on employment matters, as well as defending federal and state employment lawsuits involving FLSA, Titles II and VII of the Civil Rights Act of 1964, ADA, and the New York Human Rights Law. She can be reached at jchen@phillipslytle.com or (716) 847-5433.