Arbitration agreements containing class action waivers can be an effective way for employers to mitigate risk against defending large scale mass actions filed by employees. And in the Fifth Circuit, the federal Court of Appeals covering Texas, and three other federal circuits, individual arbitration agreement containing class-action waivers are enforceable.

In a recent Seventh Circuit Court of Appeals panel opinion, the court of appeals covering Illinois, Indiana and Wisconsin, held that individual arbitration agreement containing class-action waivers were not enforceable.  In Lewis v. Epic Systems Corporation, the company required employees to enter into individual arbitration agreements requiring the arbitration of wage and hours disputes.  The agreement did not authorize the arbitrator treat claims as a class or collectively. When Lewis brought an FLSA collective action against his employer, the company moved to compel arbitration.  The trial court refused to enforce the agreement and a panel of the Seventh Circuit Court of Appeals affirmed.

The rationale for the panel’s decision was that the agreement violated the employees’ Section 7 rights under the National Labor Relations Act.  Section 7 rights are those statutory rights that preserve employees’ right to self-organize, form, join or assist unions in collective bargaining and to engage in other concerted activity for employees mutual aid or protection.  Section 7 rights apply to employees in unionized and non-union work environments.  A wage and hour class action was, in the court’s opinion, an attempt to exercise Section 7 rights.

The court ignored, and did not discuss, the other Section 7 rights of employees that the class action waiver advanced.  Section 7 also explicitly gives an employee the right to refrain from engaging in concerted activity.  Section 7 provides, in relevant part, that “Employees shall have the right to …engage in other concerted activities…and shall also have the right to refrain from any or all such activities…”  Section 7’s “refrain from” language gives support to the legal conclusion that an employee’s waiver of the FLSA procedural right to litigate collectively is permissible under the NLRA.  And in my opinion, an employee entering into a class action waiver is exercising his or her right to refrain from participating in a wage and hour collective action.  At a minimum, the “refrain from” language should minimize or neutralize the importance of the argument that Section 7 only prohibits class action waivers.  When read as a whole, if Section 7 protects the employees’ right to engage in “concerted activity” and concerted activity includes filing wage and hour collective actions, then Section 7’s “refrain from” language must also be read to authorize class action waivers.

Because four federal courts of appeals have reached the opposite conclusion from the Lewis panel, expect this issue to be appealed to the Supreme Court to resolve the circuit split.  Employers utilizing arbitration agreements containing class action waivers should watch closely for developments in this area.  If companies do not get the benefit of class action waivers through their arbitration programs, they may reconsider whether mandatory arbitration of other employment disputes provides them with sufficient benefit to retain those programs.

You can read the Seventh Circuit decision in Lewis v Epic Systems Corporation here.