Supreme Court Upholds Employers’ Uses of Arbitration Clauses to Block Class Action Lawsuits

Arbitration Clauses

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The U.S. Supreme Court has again deflected a challenge to the use in employment agreements of dispute resolution clauses that mandate arbitration and generally bar class action lawsuits. The May 21, 2018 decision was a close call for employers: a 5-4 decision with the conservative majority carrying the day. Nonetheless, this represents a major victory in their battle against expensive lawsuits that pose extraordinary financial risks.

In Epic Systems Corp. v. Lewis, the Supreme Court dealt with challenges to class action restrictions in arbitration clauses based on the National Labor Relations Act (NLRA), which protect workers’ rights to collective activities. The NLRA guarantees employees the right to unionize and sets up an enforcement scheme under the National Labor Relations Board. After it altered its prior interpretation and held in 2012 that class actions could not be barred by arbitration clauses, challenges were filed based on a conflict between the NLRA and the Federal Arbitration Act (FAA), which provides for the enforcement of mandatory arbitration agreements. In the face of a strong dissent, the Court concluded that the NLRA cannot override the FAA because Congress did not provide for it to do so.

The use of mandatory arbitration clauses that bar class action lawsuits is growing in the Commonwealth. They provide potentially huge benefits by precluding the extreme risks presented by suits involving tens, hundreds or even thousands of employees. It is now common for larger employers who could face class actions by virtue of their sizes to mandate resolution of disputes by individual arbitration, and a growing number of small companies seeks the cost and time advantages arbitration can provide. To be sure, employers who use mandatory arbitration agreements must take care not to trample on employee rights and thereby invalidate their contracts, a result that remains possible under current law. Arbitration clauses are enforced only if they are reasonable and are contained in valid contracts between employees and employers.

Arbitration Clause in Employee Handbook is Unenforceable

In a decision that may undermine the validity of a relatively common method used by employers to require the arbitration of employment disputes, a U.S. District Court judge recently decided that a company’s dispute resolution policy, which appeared only in its employee handbook, was not enforceable. The arbitration provision, the court ruled, was not part of a contractual bargain between employee and employer. As a result and despite strong support in case law for the enforcement of employment-related arbitration agreements, a  motion to compel arbitration was denied.

The case involved an employee’s claim that her employer interfered with her maternity leave rights under the Family and Medical Leave Act (FMLA). The employee alleged in a U.S. District Court lawsuit that she was passed over a promotion and demoted to a part-time position in retaliation for asserting her rights. Citing a provision in its employee handbook — for which the employee had signed a standard receipt and acknowledgement form, which commonly appears at the end of employment manuals — the employer moved to compel arbitration. The court denied the motion, citing the facts that the manual was not negotiated by the parties and the employer reserved a unilateral right to modify its policies.

The case, Domenichetti v. The Salter School, LLC, was decided April 19, 2013. While it points up the need for employers to take care when drafting arbitration clauses, it should not undermine their general enforceability. As long as the agreements are clear, reasonable and the product of a bargained-for agreement, they will generally be enforced in Massachusetts and may even be applied to alter normal procedural rules that may apply in employment cases. (See Feb. 29, 2012 Post on this site.) Arbitration agreements are viewed favorably by many employers, which see them as a faster, less exepensive, and less risky way to resolve disputes.

Arbitration Clauses Can Shorten Filing Deadlines, Alter Procedural Rules

Employers may have a new weapon to help them combat discrimination suits by disgruntled employees — craftily drafted arbitration clauses. That view will certainly carry the day if a recent superior court decision stands up on review. In a case that once again challenged the enforceability of an arbitration clause in the employment context, the court found that, despite a drastic reduction in the time frame for filing a discrimination suit under Massachusetts General Laws chapter 151B along with unliateral controls of procedural terms by the employer, the clause was enforceable. [Read more…]