Recent Decision Casts Doubt on Whether Arbitration Agreements Can Help Protect Employers against FLSA Overtime Liability June 20, 2016

By Jack E. Moran

With all the news related to the Department of Labor’s recent changes in overtime regulations, many employers may be wondering how they can protect themselves from the significant exposure and poor publicity created by alleged violations of the overtime and minimum wage rules of the Fair Labor Standards Act (“FLSA”).  One common method of blunting FLSA risk is requiring employees to execute arbitration agreements, which force employees to litigate their wage-and-hour disputes in private arbitration rather than federal court.

One of the main benefits of such agreements is that they often mandate that employees waive their ability to bring their claims as a class.  This means that each individual employee must bring his or her claim separate from others, instead of a collection of employees forming a more powerful, unwieldy group of claims.

On May 26, 2016, however, the U.S. Seventh Circuit Court of Appeals decided Lewis v. Epic Systems Corporation, and held that such clauses in arbitration agreements are unenforceable and that employees must be allowed to sue as a class.  The court said that these “class action waivers” violate the National Labor Relations Act, which gives employees the right to engage in “concerted activity” to protect their pay and working conditions.

In Lewis, the arbitration agreement required that the employee waive “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”  The plaintiff originally agreed to the terms of the agreement.  When a dispute arose, however, the plaintiff sued in federal court alleging that he and all other similar employees were misclassified under the FLSA and were entitled to overtime.  Epic Systems moved to dismiss the complaint and compel arbitration under the agreement.  The district court denied Epic Systems’ motion, finding that the arbitration clause was unenforceable because it interfered with employees’ rights to engage in “concerted activity.”

Epic Systems appealed the decision to the Seventh Circuit, but that court reached the same result.  Specifically, the Seventh Circuit found that the federal law protecting “concerted activity” “should be read broadly to include resort to representative, joint, collective, or class legal remedies.”

In issuing this decision, the Seventh Circuit has now created a split amongst the U.S. Circuit Courts of Appeal.  The Second, Fifth, Eighth, Ninth, and Eleventh Circuits have all concluded that these “class action waivers” are enforceable.  Strangely, the Sixth Circuit has held that a FLSA “class action waiver” in an employment agreement is unenforceable, but also held that such a waiver may be enforceable if it is part of an arbitration agreement.  As a result of the inconsistency, this is likely an issue that will ultimately need U.S. Supreme Court intervention.  But it could be quite some time until guidance is issued, and both employers and employees who have questions about the enforceability of arbitration agreements should discuss those questions with an attorney.

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