Employers can require employees through a contract or policy to arbitrate individual claims, like those for discrimination, harassment, wages, and other damages. Employers who deal with union activity know that most labor grievances are processed through arbitration. Employers without unions may want to consider if there are economic benefits of requiring employees to arbitrate individual claims and to draft an enforceable arbitration provision
Last year, the United States Supreme Court decided a case that provides an additional benefit to employers with arbitration clauses. In Epic Systems Corp. v. Lewis, the Supreme Court held that an arbitration clause effectively barred a collective action under the Fair Labor Standards Act (the FLSA). Collective and class actions can be extremely costly to employers. These actions generally result in higher damage awards due to the larger number of plaintiffs and increased costs. The newest Supreme Court appointee, Justice Gorsuch, held that federal courts should enforce arbitration clauses under the Federal Arbitration Act. This opinion stops a growing trend of federal court cases where employees successfully avoided arbitration of class and collective actions.
Avoiding Class and Collective Actions Through Arbitration Clauses
The Epic decision creates a substantial benefit for employers with carefully drafted arbitration clauses. As an example, after Epic the Seventh Circuit in Herrington v. Waterstone Mortgage Corp. refused to enforce a $10 million arbitration award in a class and collective claim. The Seventh Circuit remanded the case to determine whether the arbitration clause, which said the claim “may not be joined with or join or include any claims by any [other] persons,” prevented the collective resolution of the claims. This was an Epic victory for the employer who was faced with a huge damage award.
Should an Employer Have an Arbitration Agreement?
Employers with arbitration provisions, particularly those in the Seventh Circuit, should confirm that the provisions are enforceable and prohibit a class or collective action. A court will examine the contract or policy to answer two questions: (1) is there an enforceable arbitration provision; and (2) did the parties intend to arbitrate a particular claim. If the answer to both questions is yes, the court should require the parties to arbitrate the claims.
Employers without a policy need to examine the benefit of avoiding a class or collective action with the cost of arbitrating the claims of any individual employee.
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