The Seventh Circuit recently became the first federal appellate court to say that employers can’t prevent class/collective actions through waivers in mandatory arbitration agreements, holding that such waivers interfere with employees’ rights to engage in concerted activity in violation of the National Labor Relations Act.  The court’s holding in Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. May 26, 2016), creates a circuit split on this issue and calls into question the effectiveness of such waivers for employers with employees working in states covered by the Seventh Circuit (Wisconsin, Illinois and Indiana).

Brief Background

In Lewis, a health care software company required certain groups of employees to agree to bring any wage-and-hour claims against the company solely through individual arbitration. The employees were required to acknowledge the policy by clicking two buttons in an email and were deemed to have accepted it by remaining in the company’s employ. A technical writer for the company complied with the acknowledgement requirements but then sued Epic in federal court, contending that it violated the FLSA and Wisconsin law by misclassifying him and similar employees and denying them overtime pay. The trial court refused to enforce the arbitration policy, denying Epic’s motion to compel the plaintiff to arbitrate his claim individually. The company appealed.

The Seventh Circuit Finds the Waiver Violates the NLRA

The Seventh Circuit first addressed NLRA Section 7, which gives employees the right to engage in “concerted activity.”  In the court’s view the “intentionally broad sweep” of Section 7 supported construing the “concerted activity” to encompass all types of collective legal proceedings. The court therefore concluded that the statute “renders unenforceable any contract provision purporting to waive employees’ access to such remedies.”

Next, although acknowledging that the Federal Arbitration Act had the goal of encouraging the arbitration agreements by making arbitration agreements enforceable, the court declined to rule that the FAA trumped the NLRA.  Instead, the court determined that its interpretation of the NLRA did not conflict with the Federal Arbitration Act because the FAA provides that agreements to arbitrate are enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” As the court explained, “[b]ecause the provision at issue is unlawful under Section 7 of the NLRA, it is illegal and meets the criteria of the FAA’s savings clause for nonenforcement.”

The Court Recognizes It’s an Outlier

The court acknowledged that “the circuits have some differences of opinion in this area” and observed that in addition to the Fifth Circuit’s rulings upholding class/collective action waivers in D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013) and Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015), the Second, Eighth and Ninth Circuits had also declined to set down broad rules barring such waivers when addressing the issue. The court did, however, offer one example of how employers might limit the potential adverse consequences of its decision, explaining that if the company’s “provision had permitted collective arbitration, it would not have run afoul of Section 7 …”

What’s Next?

As if to underscore the uncertainty surrounding this issue at the national level, exactly one week after the Seventh Circuit’s decision in Lewis, the Eighth Circuit issued an opinion reaffirming its position that class/collective action waivers do not unlawfully interfere with the right to engage in concerted activity (although the Eighth Circuit enforced the NLRB’s order to the extent it found the agreement violated the NLRA because employees would reasonably have read it as prohibiting them from filing unfair labor practice charges).  Accordingly, employers should continue to carefully track this issue.  Other Circuits may address it in the near future, and it could make its way to the Supreme Court (despite the current 4-4 split).  In the meantime, employers may consider whether and how to revisit their current waivers for employees working within Wisconsin, Illinois and Indiana.