Millions of workers have signed on to employment agreements containing arbitration clauses. These clauses require employees to resolve any complaints against their employer through private arbitration, rather than through the courts. On May 21^st, 2018, the Supreme Court of the United States upheld the validity of such agreements in the face of challenges mounted by individual employees.

The case is Epic Systems Corp. v. Jacob Lewis, which came to the Supreme Court via the Seventh Circuit Court of Appeals. Also resolved in the same opinion were Ernst & Young LLP v. Stephen Morris et al (Ninth Circuit) and National Labor Relations Board v. Murphy Oil USA, Inc. (Fifth Circuit).

The court was called upon to resolve a split in the circuits over whether forcing individualized arbitration violates the ability of employees to engage in “concerted activity” for their “mutual aid and protection” under the National Labor Relations Act (NLRA). In prior years, courts and the National Labor Relations Board (NLRB) held the view that arbitration agreements were enforceable, but the NLRB shifted its position in 2012, and several courts followed suit or gave deference to the position of the Board.

The employees in Lewis had wage & hour claims under the Fair Labor Standards Act (FLSA) and related state laws that they were seeking to resolve through class or collective actions in federal court. It is not uncommon for unpaid wage claims to affect more than one employee at a company, and although it might not be worthwhile for one employee to hire a lawyer and fight to recover unpaid wages or overtime, a class action of employees may be well worth the effort.

Congress Says Agreements to Arbitrate are Valid and Enforceable

The Federal Arbitration Act (the Act), first passed in 1947 and derived from an earlier act passed in 1925, requires that a written provision in a commercial contract to settle a dispute by arbitration is valid and enforceable. The Act requires courts to enforce arbitration agreements as written, although the Act contains a saving clause which removes this requirement when enforcing an arbitration agreement would violate some other law.

The employees in Lewis claimed that requiring individualized arbitration of employment claims violated their rights to engage in concerted activity under the NLRA. The employer, on the other hand, argued that the FAA protects agreements requiring arbitration from judicial interference. The employees were not helped by the fact that their underlying claims involved alleged violations of the FLSA and not an unfair labor practice under the NLRA.

The court held for the employer, noting that the Federal Arbitration Act clearly provides that agreements requiring individualized arbitration of disputes must be enforced, and neither the Act’s saving clause nor anything in the NLRA suggest otherwise.

The holding in Epic Systems Corp. v. Lewis was a 5-4 decision, with Justice Gorsuch siding with the court’s conservative justices and writing the opinion for the majority. Justice Ginsberg wrote a dissenting opinion which was joined by the other three justices in the minority.

Why Employers Like Arbitration and Employees Don’t

An arbitration may look similar to a trial on the surface, but there are significant differences, which most people agree tends to favor the employer over the employee. First of all, arbitrators are hired and paid for their services, and most often it is the employer who pays the fees. The employer may even be the one who chooses the arbitrator as well. While arbitrators are supposed to be neutral and uninterested third parties, it is commonly believed that arbitrators who tend to side with the employer (or limit the size of awards to employees) are the ones who tend to get hired the most.

Also, who are the arbitrators? Arbitrators may be lawyers or retired judges with extensive experience in managing trials and resolving disputes. Just as often or more so, however, arbitrators are business people with particular expertise in the industry involved in the dispute. This specialized knowledge is especially useful in a business between competing companies, where an arbitrator may be better than a judge or jury to understand complex or highly technical facts related to the field. But how does this knowledge play out in an employment matter about overtime exemptions or unpaid wages? Arbitrators from the field are much more likely to be current or former business owners than blue collar workers. Employees fear these arbitrators are inclined to side against them compared to a jury trial where their peers are better represented. For the same reason, employers often fear taking an employment case in front of a jury.

Another disadvantage to employees in an arbitration is the limited ability to access employer records and prepare a case. In a court action, workers have the ability to subpoena witnesses and compel production of documents, but not so in an arbitration. Whether it is payroll records in a wage and hour claim or emails and memos in a discrimination case, employees are much more likely to need access to employer records than the other way around.

When these factors are coupled with the extremely limited ability to appeal an arbitrator’s binding decision, it is clear why more and more employers are including arbitration provisions in their employment contracts. With this latest seal of approval from the Supreme Court, more and more workers around the country may soon discover arbitration provisions embedded in their employment relationship as well.