Supreme Court Finds in Favor of Employment Arbitration Clauses

By David Johnson and John Swinney - Franczek Radelet P.C.

May 21, 2018

On Monday, the Supreme Court issued an opinion regarding the validity of arbitration clauses in individual employment contracts. The decision, referred to here as “Epic Systems,” consolidated three separate cases-- Epic Systems Corp. v. Lewis, Ernst & Young, LLP v. Morris, and NLRB v. Murphy Oil, USA. At issue was the question of whether employers could require that employment disputes be settled through individual arbitration or whether waivers of the ability to proceed with a class or collective action necessarily violate the command of entirely different statutes that allow employees to engage in collective or concerted activity.  In a 5 to 4 holding, the Court affirmed that such arbitration provisions are valid and enforceable.

Arbitration clauses in contracts have historically been upheld by the Supreme Court under its interpretation of the governing law, the Federal Arbitration Act (“FAA”). Enacted in 1925, the FAA supports and encourages dispute resolution through the process of private arbitration. The Supreme Court has long understood the FAA to require the courts to respect and enforce private arbitration agreements and the provisions therein. In 2013, in American Express Co. v. Italian Colors Restaurant, the Supreme Court further expounded on the scope of the FAA by holding that class action waivers contained in arbitration clauses are valid. Nonetheless, the question of whether class action waivers interfere with statutory rights granted by other labor laws, such as the FLSA and NLRA, remained and was brought to a head in Epic Systems.

In Epic Systems, employees who were contractually obligated to settle disputes with their employer through individual arbitration challenged their contracts as conflicting with the rights guaranteed by another federal law, the National Labor Relations Act (“NLRA”). Namely, these employees alleged that forced individual arbitration, which prohibits employees from bringing a class action suit or group arbitration, conflicts with the NLRA’s Section 7 rights to engage in “concerted activity.” The employees argued that the arbitration agreements conflicted with right to engage in concerted activity guaranteed under the NLRA and that the conflict had to be resolved in favor of the NLRA.

The Court based its decision on two considerations: (1) the Court’s requirement, when two acts of Congress are allegedly in conflict, to give effect to both and bring them into harmony, and (2) the absence of language in the NLRA regarding arbitration. Writing for the majority, Justice Gorsuch wrote that, “as a matter of law the answer is clear. In the Federal Arbitration Act, Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.” In holding that there was no conflict between the FAA’s recognition of class action waivers and the NLRA’s emphasis on the right of employees (including those not represented by a union) to engage in concerted activity, the majority adopted a narrow reading of the rights protected by Section 7. The Court found that Section 7 protects efforts aimed at organizing and collective bargaining in the workplace, “not the treatment of class or collective actions in court or arbitration proceedings.”

Interestingly, though, while affirming the enforceability of individual arbitration clauses, the Court seemingly signaled a skepticism of the benefit of such provisions. Justice Gorsuch noted, “[y]ou might wonder if the balance Congress struck in 1925 between arbitration and litigation [with the signing of the Arbitration Act] should be revisited in light of more contemporary developments. You might even ask if the Act was good policy when enacted.” Ultimately, though, the Court noted that, based on the FAA’s clear language, it is “difficult to see how to avoid the statute's application.”

This decision is one of the most important labor and employment developments of this term. In this decision, the Supreme Court has expressly upheld an employer’s ability to require arbitration be brought on a one-by-one basis. This may result in fewer employees bringing claims against employers if the amount in dispute is relatively small. Further, this holding may signify that employers may require resolution of a broad range of work-related claims through individual arbitration as well.