In Epic Systems v. Lewis, the U.S. Supreme Court issued a major ruling for employers that will significantly limit the claims against them brought by employees. At issue was the legality of agreements between employers and employees that restrict the resolution of disputes to single employee arbitration. The Court ruled 5-4 that such agreements are enforceable.
Arbitration is a form of private dispute resolution that is often contrasted with traditional litigation in the federal and state court systems. Proponents of arbitration argue that it leads to more efficient, less formal, and less expensive resolution of disputes. Critics point out that agreements to arbitrate require workers to give up their rights to access the court system and are often prerequisites for hire–leaving them little choice, if pressed, to take the job because of financial concerns. What does an arbitration agreement like this look like? The Court offered an example from Ernst & Young LLP v. Morris, one of the consolidated cases up for decision as part of Epic Systems v. Lewis, which involved EY and one of its employees:
“…Ernst & Young and one of its junior accountants, Stephen Morris, entered into an agreement providing that they would arbitrate any disputes that might arise between them. The agreement stated that the employee could choose the arbitration provider and that the arbitrator could ‘grant any relief that could be granted by . . . a court’ in the relevant jurisdiction. The agreement also specified individualized arbitration, with claims ‘pertaining to different [e]mployees [to] be heard in separate proceedings.’”
The key language in this arbitration agreement is the prohibition on class actions, where similarly situated employees collectively take legal action against their employer. After Morris’ employment ended, despite the agreement, he sued EY under the Fair Labor Standards Act and California law on behalf of himself and a nationwide class of junior accountants in federal court.
So, here’s how the Court reached its decision.
Underlying the issue of whether single employee arbitration agreements are legal and binding are two dueling federal statutes. The Federal Arbitration Act (FAA) was adopted by Congress in 1925 and stated that Courts must treat arbitration agreements as “valid, irrevocable, and enforceable.” This is pretty strong language in favor of arbitration agreements. But the FAA has a “savings clause”, which is legalese for a provision that limits the legislation’s reach. The FAA’s savings clause permits courts to render unenforceable certain arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.”
According to the employees in Epic Systems, the National Labor Relations Act (NLRA), which protects workers’ right to act collectively for their own betterment, is exactly the type of law that would allow the Supreme Court to rule in their favor under the FAA’s savings clause. The basic argument is this: acting collectively under the NLRA includes acting together in the Courts. To restrict this right by compelling employees to separately pursue their claims both violates the NLRA and fits nicely within the FAA’s savings clause. Further, the employees argued, the NLRA trumps the FAA as a matter of course. The NLRA was passed 10 years after the FAA. Its strong employee protections represent Congress’ intent to prohibit individualized arbitration agreements like those at issue.
The Supreme Court did not agree, however. Justice Neil Gorsuch, who drafted the majority opinion, wrote that the FAA’s savings clause permits courts to invalidate only those arbitration agreements that are subject to traditional contract defenses, such as fraud, duress, or unconscionability. As an example, a contract entered into while one party is dangling the other off the edge of a cliff is not a valid agreement. In the Court’s view, the employees demanded a fundamental change to the nature of arbitration to allow for class action lawsuits compared to how it currently exists: traditionally informal and individualized. This argument is of a different character altogether from a situation where a person was defrauded or compelled under duress into signing an agreement. As to whether one federal statute trumps the other, the Court spent considerable time explaining that it is not the Court’s job to “pick and choose” among legislation; wherever laws can coexist they will and the Court will give effect to both.
The decision is not without its critics. As Justice Ruth Bader Ginsburg suggests in a sharp and lengthy dissent, this ruling could lead to an underenforcement of federal and state laws. Some employees may be less likely to pursue their claims if the option to join a class is unavailable. Unscrupulous companies may be empowered to skirt their legal obligations. In this way, Epic Systems provides insight into the Court’s deep divisions, perhaps allowing Court watchers to better predict future watershed decisions. Justice Gorsuch, the newest member of the Court, used multiple pages in this high-profile case to systematically attack Justice Ginsburg’s dissent, firmly aligning himself with the other four right-leaning justices. Justice Ginsburg, for her part, took the unusual step of reading her dissent aloud from the bench.
Ultimately, Epic Systems’ decision will considerably impact employment disputes. Where an employee has signed an agreement to arbitrate on an individualized basis, the Court has shut the courtroom door. For this reason, employers can have more confidence that their arbitration agreements with employees will be enforceable and that they will not be subject to “surprise” class-action lawsuits concerning issues defined in their agreements. Employers in California should note that they face conflicting authority about the arbitrability of claims brought by employees under California’s Private Attorneys General Act (“PAGA”). California Supreme Court precedent indicates that these claims can proceed in Court, while federal Ninth Circuit authority dictates that these claims should go to arbitration if an agreement to arbitrate exists. If hit with a PAGA claim, consult with counsel to determine the best course of action.