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Breaking News: Supreme Court and Arbitration

Depending on your preferred news source, the Supreme Court has given employers the right to ban class action lawsuits by employees or the Supreme Court has sided with employers in matters related to arbitration agreements with employees. The truth, as always, lies somewhere in the middle.

In a single opinion that decided three cases, the Supreme Court ruled that employers with individualized mandatory arbitration agreements cannot be preempted by the National Labor Relations Act. So what does that mean?

A quick refresher on the laws. In 1925, Congress enacted the Federal Arbitration Act which directed courts to enforce arbitration provisions in contracts or an arbitration contract as it is was written. The Arbitration Act also said that the parties to the contract can dictate the terms and procedures of their mutual arbitration.

Ten years later, Congress enacted the National Labor Relations Act which included in Section 7 of that law, the right of employees to form, join, support or assist, labor unions or to take other action “collectively” to discuss among themselves the terms and conditions of their employment. Employees could act collectively (through bargaining units) to bargain with the employer about the terms and conditions of employment.

Until very recently (well, recently in legal terms means the late 1990’s or early 2000’s), these acts rarely came into conflict. Even as late as 2010, the National Labor Relations Board said that the two acts worked in harmony. The NLRB said that employees could “benefit from the relative
simplicity and informality of resolving claims before arbitrators” and that the NLRA was not impacted by arbitration agreements. But in 2012, the NLRB reversed itself and, as the Supreme Court noted, said that the NLRA actually nullified the Arbitration Act when it came to arbitrating employment conditions cases.

The three cases decided yesterday all had similar fact patterns. An employee had an employment contract that called for the use of individual arbitration for any employment-related dispute. The arbitration term prohibited the use of class action or collective action arbitrations. The employees argued that the NLRA Section 7 rights gave them the right to use class action arbitrations in order to work with other employees to make a claim and share the costs of arbitration. In cases from the Seventh and Ninth Circuit Courts of Appeals that found for the employees and a case from the Fifth Circuit Court of Appeals that found for the employers, the Court was faced with trying to interpret what the two laws mean and how they should be applied. (By the way, if you want your case to go to the Supreme Court, one sure fire way is to get a similar case decided differently by another Circuit Court of Appeals–the so-called Circuit Split).

Yesterday, the Supreme Court stated that when faced with two statutes (the FAA and the NRLA) that touch on the same subject, the Court must find a way to make both laws apply and operate. The Court, speaking through Justice Gorsuch (in what is probably his most high profile opinion yet) said that the FAA requires the enforcement of arbitration agreements as they are written, including arbitration agreements signed by an employer and an employee that call for individualized arbitration. The Court further said that the NLRA does not provide for class action lawsuits or class action arbitrations. The discussion is somewhat lengthy but boils down to this: The Supreme Court cannot pick and choose which law is more important than another law.

The NLRA is a very comprehensive law. The statute has specific procedures for the enforcement of the rights contained in the law spelled out in Section 7. This kind of specificity indicates that Congress put a lot of thought into the law (and they did). Congress did not specify what kinds of legal (court or arbitration) procedures that could be used to enforce the rights. Justice Gorsuch noted that class and collective actions where largely unknown in 1935. However, even if they were known, Congress, having written the Federal Arbitration Act in 1925 would be tasked with the knowledge of the 1925 law when writing a 1935 law. Congress, according to the Court, did not manifest a clear intent to repeal or alter the FAA when it created the NLRA.

What has also been missed in the immediate fallout of this opinion, is that the Court and Justice Gorsuch are practically begging Congress to address this issue and consider the implications of this issue in light of recent labor market and historical factors. Whether Congress does anything is an open question, and a question for a different time.

Practical Advice Time

So the real question is what does this mean for employers and employees? First, it does mean that individual action arbitration agreements will be enforced. Second, it means that the NLRA does not provide as one of its rights, the right to class action or collective action LAWSUITS by the employees themselves to enforce workplace protection rights under Section 7. (NOTE: this does not mean that the NLRB can’t bring actions, which its does regularly). Third, employees can still bargain, can still work together to address workplace conditions and pay, and it is illegal for a business to retaliate against employees who do so.

So what should employers do? Immediately institute an individual action only arbitration agreement? Rewrite policies? Change employment agreements?

Employers could do that, but the deeper question is should they do that? Long-time readers of this blog will recall, I am not a big fan of arbitration. That opinion has not changed, I believe mediation is always a better option. I think the fears of mass changes to individual arbitration agreements are misplaced. For now, I am not suggesting employers should adopt wholesale individual action only arbitrations.

There are some people who think that individual action arbitrations are going to be cheaper for the employer while being expensive for the employee. I don’t think that will happen. Legal fees are going to be unchanged for employees (which is a larger problem but outside the scope of this post) Unlike commercial arbitration, an employee filing an arbitration with the American Arbitration Association will pay $300 (or maybe less), which is less than the $400 filing fee for federal court, but more than most state court filing fees. Unlike commercial arbitration, in employment arbitration (at least under the AAA rules), the arbitrator is paid by the company or employer. (“The employer or company shall pay the arbitrator’s compensation unless the employee or individual, post-dispute, voluntarily elects to pay a portion of the arbitrator’s compensation. Arbitrator compensation, expenses as defined in section (v) above, and administrative fees are not subject to reallocation by the arbitrator(s) except upon the arbitrator’s determination that a claim or counterclaim was filed for purposes of harassment or is patently frivolous.”). Arbitrator fees vary by the arbitrator themselves.

So, unlike Commerical Arbitration, employment arbitration fees and costs will likely not be the deterrent that some of the more employee-friendly advocates would suggest. In fact, individual arbitration only agreements may actually be more expensive for the employer than for the employee. Employers should consider that factor closely.

The second factor for employers to consider is that if you are going to change or add an individual action arbitration agreement for your existing employees, you will have to address the issue of consideration. Any contract requires the parties to give something to the on the other party so that the other party will sign the contract. So, if an employer is going to ask or require an employee to sign a new arbitration agreement, the employer has to give something to the employee for that promise. What to give is, of course, an open question. But if an employer implements these kinds of agreements, and they don’t have consideration from the employer, then these agreements will be subject to attack for lack of consideration and therefore unenforceable.

If an employer is going to create and implement an individual action arbitration agreement, please call to schedule a time to talk. Such agreements may not be in your favor.