News & Events

Arbitration Agreements, Class Action Lawsuits, and the Supreme Court’s Ruling

By:  Ken Smith

The Supreme Court of the United States recently issued a major decision in the case Epic Systems Corp. v. Lewis that upholds the rights of employers to require its employees to pursue individual arbitration for resolving employment disputes.

In Epic Systems, a company employee sought to file a lawsuit against his employer in federal court for failure to pay overtime wages under the Fair Labor Standards Act. The employee tried to file the case as a class action – in other words, on behalf of himself and similar employees who also were allegedly not paid overtime.  Traditionally, because individual claims generally don’t have high value, employees and their lawyers have filed class actions on behalf of a much larger group of employees to leverage settlements and increase legal fees. However, in this case,  the employee had signed an arbitration agreement that explicitly stated any claims relating to his employment would be subject to individual arbitration, and that any claims pertaining to different employees would be heard in separate arbitration proceedings. In other words, the agreements specifically prohibited class actions.

The employee challenged the arbitration agreement, in part, by alleging that the agreement violated the Fair Labor Standards Act. Specifically, the employee pointed to a part of the FLSA that allows for class action lawsuits and claimed that this conflicted with law authorizing the arbitration of employment disputes. The employee also alleged that forcing him to go to individual arbitration violated the National Labor Relations Act, which provides employees the right to engage in “concerted activities” for collective bargaining or other mutual aid or protection.

But the Supreme Court held that when Congress passed the Federal Arbitration Act in 1925, it evidenced a liberal federal policy favoring arbitration. In light of this policy favoring arbitration, the Supreme Court found that there was no conflict between the FLSA and the arbitration agreement. In order to escape from individual arbitration, the employee would have had to demonstrate that the arbitration agreement was entered into fraudulently, or that he was placed under duress when he signed the agreement, or that the agreement was so unfair that it should not be enforced. The employee did not claim any of those defenses.

Moreover, the Supreme Court found that the National Labor Relations Act focuses on the rights of employees to organize unions and bargain collectively. It does not say anything about class action lawsuits or that it overrules the Federal Arbitration Act.

Bottom line, the Epic Systems case is a strong endorsement from the Supreme Court that arbitration agreements are lawful and can be used for a wide variety of employment disputes. Even where employees seek to band together to bring a class action lawsuit in the court system, each employee who signed an arbitration agreement can instead be compelled to litigate his or her  claims in a separate arbitration proceeding. Epic Systems is a big win for employers who prefer the generally quicker, less costly arbitration process over being tied up in court. Employers are encouraged to consider arbitration clauses as part of their employment agreements and policies.