In a recent opinion, the U.S. Court of Appeals for the Seventh Circuit broadened the conflict over whether employers may require employees to arbitrate their employment claims individually, instead of through class or collective actions. Specifically, in Lewis v. Epic Systems Corp., issued on May 26, 2016, the Seventh Circuit sided with the National Labor Relations Board (NLRB) and held that collective action waivers violate the National Labor Relations Act (NLRA) and cannot be enforced. 

The decision creates a circuit split on this issue because the Fifth Circuit previously ruled that such arbitration agreements and class action waivers were fully enforceable. A standoff at the U.S. Supreme Court on the issue is likely. How this circuit split will be resolved may depend on how the Supreme Court views its prior decisions on class action waivers – including a decision authored by the late Justice Antonin Scalia for a narrowly divided Court. In the interim, employers could find their arbitration policies subject to more challenges by the NLRB and plaintiff employees.

The decision comes at a time when the growing number of class actions has caused many employers to adopt arbitration agreements with class action waivers to protect their businesses from costly and protracted lawsuits. A single wage and hour class action can take years to resolve and large plaintiff classes can threaten a company’s entire existence. Thus, the validity of contracts that compel individual arbitration for wage and hour and other employment claims is a legal issue with important financial consequences for all employers.

Lewis v. Epic Systems Corp.

In Lewis, an employee of a healthcare software company, Epic Systems, filed a Fair Labor Standards Act (FLSA) collective action lawsuit contending he and other technical writers had been misclassified as exempt from federal overtime rules. Before filing the lawsuit, the plaintiff had agreed to an arbitration policy which waived his ability to bring a collective action and required him to arbitrate any wage disputes individually. When the employer requested that the trial court dismiss the FLSA lawsuit and compel individual arbitration, the plaintiff countered that the NLRA rendered the arbitration agreement unenforceable. The trial court agreed with the plaintiff, and Epic Systems appealed. The Seventh Circuit affirmed the trial court’s decision, agreeing with the NLRB that a contract which prohibits class action arbitration is unenforceable.

The Seventh Circuit’s opinion in Lewis is based on resolving a potential conflict between two federal laws — the NLRA and the Federal Arbitration Act (FAA). The FAA provides that courts must give effect to arbitration agreements, unless they find “such grounds as exist at law or in equity for the revocation of any contract.” The NLRA has been interpreted to prohibit any contract or agreement which tends to “interfere with, restrain, or coerce” employees’ exercise of their rights to “engage in . . . other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The question before the Seventh Circuit was whether employees’ rights under the NLRA effectively trumped the provisions of the FAA in labor and employment cases. The Seventh Circuit favored a broader reading of the NLRA, concluding that unlike other statutes which merely permit class actions, the NLRA protects class actions as a form of collective action by employees. The class action procedure, according to Lewis, is a substantive right under the NLRA when employees are bringing the case. 

The New Circuit Split

The Seventh Circuit’s opinion in Lewis conflicts with the Fifth Circuit’s precedent on class action waivers. The Fifth Circuit repeatedly has rejected the NLRB’s position that employers may not require individual arbitration of wage and hour claims, and first laid out its reasoning in D.R. Horton, Inc. v. NLRB in 2013. 

In D.R. Horton, the NLRB brought enforcement proceedings against a home building company, alleging in part that its arbitration agreements violated the NLRA because they prohibited class arbitration. The employer appealed to the Fifth Circuit, and the panel rejected the NLRB’s position. In contrast to Lewis, the Fifth Circuit relied on the principle that access to collective actions is a procedural rather than substantive right, and the FAA permits arbitration contracts that define and restrict procedural rights. The Fifth Circuit placed particular emphasis on the fact that modern class action and collective action practice did not exist when the NLRA was enacted in 1935, making it unlikely its drafters viewed class actions as a form of protected labor activity. Until the Seventh Circuit decided Lewis, the Fifth Circuit’s holding was the only position taken by the federal appellate courts, with the Second, Eighth, and Eleventh Circuits also declining to defer to the NLRB’s interpretation.   

The split between the Fifth and Seventh Circuits likely will be resolved by the Supreme Court, based in large part on the Court’s 2011 decision in AT&T Mobility LLC v. Concepcion. Writing for a five-justice majority in Concepcion, Justice Scalia concluded that the FAA preempted a California contract doctrine which invalidated class action waivers. Justice Scalia observed that class action arbitrations, unlike arbitrations of individual claims, would be so costly and procedurally complex that they offered few advantages over simply litigating disputes in court. Because the FAA promotes streamlined proceedings, Justice Scalia reasoned, requiring “the availability of classwide arbitration . . . creates a scheme inconsistent with the FAA.”

The Fifth Circuit considered Concepcion’s discussion of class action arbitration to be a clear statement that the FAA not only permits agreements limiting collective actions, it was never intended to preserve a right to collective actions. In contrast, the Seventh Circuit in Lewis held that Justice Scalia’s discussion of class action arbitration in Concepcion was not binding precedent, because it was not essential to deciding the issues before the Court. If the Fifth Circuit’s reading of the opinion prevails, the NLRA must yield to the FAA’s policy of encouraging streamlined proceedings.   

Nevertheless, until the Supreme Court resolves this split of appellate authority, employers will face continued uncertainty about the permissible scope of their arbitration agreements. Furthermore, the Seventh Circuit’s decision may not only impact employers within that court’s jurisdiction, but could encourage the NLRB and plaintiffs to push for similar outcomes in other circuits, in the form of unfair labor practice charges and courtroom challenges to employment agreements. Employers should review their arbitration policies to determine what impact Lewis may have on their ability to avoid costly FLSA collective action proceedings.