Given the choice, are employers better off arbitrating employment disputes, or litigating them in court? This is a difficult question, and employers should not select arbitration lightly, it has serious drawbacks. Nevertheless, the positive aspects of arbitration as an option continue to increase as courts continue to follow the Supreme Court and enforce arbitration agreements which bar class litigation. The prospect of avoiding class litigation is a significant incentive for employers to consider arbitration as an option, despite the disadvantages of arbitration. Following a trend, a California Appellate Court recently upheld an individual arbitration provision in a plaintiff’s employment agreement which precluded her class claims under the Fair Labor Standards Act ("FLSA"). The case is Jennifer Outland, et al. v. Macy’s Department Stores, Inc., Case No. A133589 (Ca. App. 1 Dist. Jan. 16, 2013). In putting a halt to the plaintiff’s class action lawsuit, the court held that the Federal Arbitration Act preempts California decisional law rendering class action waivers unenforceable.

The plaintiff worked as a Macy’s sales manager for over 27 years before leaving in 2008. Her 2009 lawsuit claimed she typically worked 50 or more hours per week and was not compensated for overtime, missed meal time, or rest periods because Macy’s had incorrectly classified her as an exempt employee. The plaintiff alleged that all Macy’s group sales managers had been mis-classified, and filed on behalf of herself and a class of all California residents employed with Macy’s in a similar position.

Macy’s employment agreements contained a waiver of employees’ rights to multi-party or class action arbitrations, and required workers to participate in a specific dispute resolution program called "InSTORE." The plaintiff ignored the waiver of class action arbitrations in her contract based on a series of decisions by the California Supreme Court that allowed her to do so. In 2005, the California Supreme Court decided Discover Bank v. Superior Court, 36 Ca. 4th 148 (2005), finding a class action arbitration waiver unconscionable and therefore unenforceable in the context of a customer contract. The California Supreme Court extended its logic on class arbitration waivers to employment agreements in 2007, finding in Gentry v. Superior Court, 42 Cal. 4th 443 (2007) that such a waiver is unconscionable, and therefore unenforceable.

In 2011, with the plaintiff’s case still pending, the United States Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). The Concepcion decision invalidated the California Supreme Court’s Discover Bank rule and upheld a waiver of class claims in a customer contract. The Supreme Court reasoned that the Federal Arbitration Act preempts California law requiring class-wide arbitration. Armed with the Concepcion decision as precedent, Macy’s filed a motion to compel arbitration based on the plaintiff’s failure to pursue individual arbitration through the InSTORE program. Macy’s motion distilled this case down to one issue: does the Federal Arbitration Act’s preference for arbitration clauses preempt the court-created right to a class action lawsuit under the FLSA? In other words, does the Supreme Court’s decision in Concepcion also have the effect of overruling the California Supreme Court’s Gentry decision?

For now, the answer to both questions is "yes." The appellate court affirmed the trial court’s decision that the plaintiff could not pursue her class claims because she failed to participate in the InSTORE program. The appellate court found the reasoning behind the Supreme Court’s Concepcion decision applies with equal weight to employment agreements. The Federal Arbitration Act, with its express preference for arbitration agreements between contracting parties, overrides any state law or judicially created rule to the contrary.

The appellate court also rejected an argument that federal labor law trumps the FAA in the context of wage and hour litigation. The court expressly refused to follow a recent NLRB decision finding a class action or collective claims waiver in an employment agreement violates employees’ rights to engage in concerted activities under section 7 of the NLRA. The appellate court noted that the "interplay of class action litigation, the FAA, and section 7 of the NLRA" falls outside the NLRB’s core expertise.

This case is significant for a number of reasons. Most importantly, it allows California-based employers to shield themselves from costly class-based wage and hour litigation by including a waiver in their employment agreements. The decision also represents another step in a series of decisions that have been percolating in California state courts and may eventually end up in the U.S. Supreme Court. For employers outside of California, there is no reason why the Concepcion decision would not trump public-policy arguments against class-action waivers in other states, as well.

The law in this area is certainly not settled, and the contrast between the Supreme Court’s ruling in Concepcion and the NLRB’s position has led to varying results. Within the last couple of weeks, the Eight Circuit Court of Appeals found class action waivers enforceable, while a District Court in Alabama found some waivers may be unenforceable.　 Several other Circuit Courts are scheduled to hear arguments on the issue in the coming months. Employers are advised to consult with counsel in order to craft effective employment agreements that minimize potential exposure to wage and hour and other class-based claims.