You already know that on May 21, 2018, the U.S. Supreme Court issued a 5-4 decision in Epic Systems. The Court’s long-awaited decision finally and conclusively establishes that class waivers in arbitration agreements between employers and employees are, in fact, enforceable under the Federal Arbitration Act (FAA). Now you must decide whether, when, and how to introduce and use arbitration and class action waiver agreements. And, you may be wondering, is this really an end-game? (Spoiler alert: state law and agency action still matter, and who knows what to expect from Congress.)
This decision will have far-reaching implications, perhaps most significantly (and immediately), it offers employers a tool to limit costly and protracted class action litigation, especially litigation related to alleged wage and hour violations and discrimination or harassment claims. But employers still need to be sure their agreement is well-written and covers the bases. The only way an employer can be assured that a class waiver will be enforceable is to have a bi-lateral arbitration agreement that satisfies the FAA (which is easy to do). Employers in many states must look to the FAA to achieve federal preemption of state law restrictions on class action waivers. Employers who have not recently reviewed their arbitration agreements, or who otherwise have not considered whether they should include class waivers in their arbitration agreements, should do so in light of the Epic Systems decision.
1. Weigh your options.
Arbitration agreements are not a one-size-fits-all solution for all employers. It may be that the pros and cons balance differently for different employee groups with different compensation schemes, job duties, or roles within the company. Public relations and publicity factors may drive some employers to evaluate the benefits of arbitration differently than other employers. In some industries, arbitration may be better suited to address disputes with highly paid executive employees than it would be for disputes with front-line hourly employees, due to cost factors, the company’s litigation trends, or publicity considerations. In other businesses, the opposite may be true.
With respect to class actions, an employer may decide it does not want to face a series of identical arbitrations where there a number of similarly situated aggrieved employees. Some arbitration agreements allow claims to proceed in a collective or class action arbitration proceeding.
In some industries, employees may be more likely to pursue individual claims in arbitration than they would be to participate in a class action or individual court proceeding. Keep in mind, employees benefit too (in some cases more) when it comes to confidentiality and the costs of arbitration.
As you revisit your company’s perspective on arbitration and/or its current arbitration agreement in the aftermath of Epic Systems, consider the following advantages and disadvantages to arbitration:
- Ability to avoid class actions (most of the time, with a properly written agreement).
- Informality of the proceeding compared to a courtroom setting.
- May be quicker depending upon court backlogs.
- Less expensive (theoretically) – due to informality, speed, and fewer procedural landmarks.
- Practical obscurity and less publicity concerning the dispute. Confidentiality is not guaranteed, however.
- Experienced legal professional (maybe even a specialist in the field) as fact-finder versus jury of laypersons.
- Eliminates risk of runaway jury verdicts on emotional distress damages.
- Lower chance of high emotional distress award, thereby decreasing value of “high dollar” cases in eyes of plaintiffs’ counsel.
- Inexpensive and easy for plaintiffs – not as important to have an attorney to navigate through the process.
- Arbitrators are not necessarily less likely to find employers liable or to award significantly less damages.
- Virtually no right to appeal an adverse decision. An arbitrator’s ruling, no matter how outrageous, is more binding than a decision by a judge or jury.
- Arbitrator fees and arbitration administrative fees have grown exponentially as arbitrators and arbitration services have become more professional (like paying for a private judge).
- Arbitrators often allow many of the cumbersome and expensive judicial procedures, like discovery and motion practice, into arbitrations.
- The less formal hearing procedures combined with the arbitrator’s almost unfettered discretion in how to conduct the arbitration process may excuse employees and their counsel from following “the rules.”
- Employers may be less likely to obtain summary judgment or dispositive rulings in arbitration than if the case were heard in federal court.
2. Make the tough decisions and draft a thorough agreement.
Once you have weighed your options and know what you want, you still have work to do. Some employers face the decision of whether to modify existing arbitration agreements with current employees or impose agreements with current employees who currently do not have one at all. The enforceability of an agreement entered into mid-stream with a current employee may depend on the circumstances and relevant state law. An exchange of promises may be sufficient consideration to enforce an agreement, but consider how you will present a new agreement to current employees in a positive light.
After deciding whether to require arbitration, and for whom, be sure the arbitration agreement is properly drafted to address various important decision points. For example, do you allow opt outs? Do you want to proceed under a specific set of rules or with a specific administrator (AAA, JAMS), or a more fluid private arbitration context? Who will pay which fees? Do you want to build in a limited appeal mechanism, so a particularly bad decision may be revisited by a second arbitrator? Arbitration appeal procedures can be useful in high-stakes cases, such as a collective or class action arbitration. Think through the details, and consult with colleagues and other resources who know where disagreements are likely to arise and which provisions are susceptible to unconscionability claims.
3. Know the extent of enforceability.
Employers must consider the state or local laws that affect the rights of their employees. For example, on April 12, 2018, Governor Andrew Cuomo of New York signed the “New York State Budget Bill for Fiscal Year 2019.” Included in New York’s Budget Bill is language that prohibits any contractual provision that requires employees to submit their sexual harassment claims to mandatory arbitration, except where inconsistent with federal law or part of a collective bargaining agreement. Similarly, the California legislature currently is debating Assembly Bill 3080, which would amend the California Fair Employment and Housing Act to prohibit mandatory arbitration of sexual harassment claims. It remains unclear whether state or federal courts will uphold these state provisions, or whether they will conclude that the FAA preempts the state laws.
Federal and state administrative agencies may still pursue collective/class action proceedings in their own right, even if individual employees are bound by arbitration agreements. In some instances, state agencies already have deputized employees to pursue collective actions on behalf of the state. California has the Private Attorneys General Act (PAGA) that allows employees to serve as private attorneys general and file collective actions relating to certain violations of the Labor Code. The California Supreme Court already has held, and the Epic Systems holding does not change, that PAGA claims are not subject to mandatory arbitration provisions, since an employer cannot bind the State of California.
4. Be ready for changes down the road.
States may follow the examples of New York and California to carve out pathways to court for certain types of claims. The Federal Arbitration Act is also not immune to amendment. Congress may still weigh in on federal law, particularly in light of the Epic Systems decision. As the political climate continues to heat up around the subject of sexual harassment and related issues, there appears to already be some legislative discussion about exemptions or additional requirements to be imposed on employers who seek to arbitrate employment-related claims. See S.2203 - Ending Forced Arbitration of Sexual Harassment Act of 2017.
The Epic Systems holding confirms that an arbitration and class action waiver agreement is, at a minimum, a strong risk management tool that all employers should consider. But, employers must consider several factors when considering how to draft and implement them.