The legality of class action waivers in employment contracts.

Author:Redgrave, Benjamin M.
 
FREE EXCERPT

INTRODUCTION

Imagine you are a new employee at a large corporation. As part of your orientation, you are instructed to sign a number of different documents in order to formally begin your employment. Among them is a waiver that says something like this:

All claims, disputes, or controversies arising out of, or in relation to this document or Employee's employment with Company shall be decided by arbitration.... Employee hereby agrees to arbitrate any such claims, disputes, or controversies only in an individual capacity and not as a plaintiff or class member in any purported class, collective action, or representative proceeding. (1) Is such a waiver legally enforceable? And more importantly, should such a waiver be legally enforceable? The answer is far from clear, as the recent and widening circuit split on the issue demonstrates. (2) Moreover, the enforceability (or lack thereof) of these waivers can have an enormous impact on the relationship between employers and employees as well as the burden on the court system.

For example, assume such waivers are enforceable. Every company will have an incentive to include them in their employment contracts since they provide companies much more control over any potential litigation--the company, not the employee, gets to dictate the terms on which any disputes are to be resolved. (3) This would shift the balance of power between employer and employee in favor of the employer, as it would dissuade employees from bringing minor suits in which any possible recovery would be outweighed by the cost of arbitration (4) and force employees to bring actions against their employer through a specific type of legal action (arbitration) that might not be in their best interest. (5) As a result, employees' ability to hold their employers accountable for unfair actions could be severely limited, if not completely obliterated.

Conversely, if such waivers are unenforceable, then employees will be free to bring collective actions that are likely to be resolved through the court system. (6) Moreover, they may have large incentives to bring such actions: if each individual employee has only suffered a small amount of harm at the hands of his employer, it may not be worth his time to bring an individual claim (7)--and he will be unlikely to find an attorney willing to represent him. (8) Both issues are easily resolved once the employees can pool their claims, but this approach is not without its disadvantages. By allowing (and potentially creating an incentive for) employees to bring their claims collectively in court rather than through individual arbitration the already overtaxed court system (9) might see a rise in class action lawsuits that it is ill-equipped to handle. (10)

This Note attempts to bring clarity to this controversy by examining the two competing statutes at issue--the National Labor Relations Act (NLRA) and the Federal Arbitration Act (FAA)--the Supreme Court's cases on the issue, and the arguments for and against such waivers advanced by the Second, Fifth, Seventh, Eighth, and Ninth Circuits, which have all directly addressed the question. Part I provides an overview of these two statutes, the agency that administers the NLRA," and the evolution of the Supreme Court's jurisprudence on the topic. Part II discusses the Supreme Court's most recent (12) cases addressing mandatory class action waivers. Part III elaborates the current circuit split on the issue, examining the main cases from the five circuits that have directly addressed the issue. Finally, Part IV analyzes the issue in light of the statutes, Supreme Court precedent, the circuit courts' reasoning, and competing policy arguments, and argues that collective action (13) waivers in employment contracts should be unenforceable.

  1. BACKGROUND

    Before discussing the enforceability of collective action waivers, it is important to understand the context that gives rise to the debate in the first place. At the heart of the issue are the two aforementioned federal statutes and the Supreme Court's evolving interpretation of them. Consequently, this Part begins by examining the statutes and concludes by giving an overview of the Supreme Court's general arbitration jurisprudence. It also gives a brief account of the federal agency responsible for dealing with labor and employment questions, the National Labor Relations Board (NLRB), in the Section describing the NLRA.

    1. The Statutes

      There are two main statutes--the FAA and the NLRA--that have a major impact on the legality of class action waivers in employment contracts. (14) This Section gives a brief overview of these two statutes, focusing on their text.

      1. The FAA

        The Federal Arbitration Act was initially passed in 1925 in response to a number of court decisions that had held arbitration agreements unenforceable. (15) Consequently, its main goal was "to make valid and enforcible agreements for arbitration contained in contracts involving interstate commerce." (16) The statute mandates by its terms that:

        A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. (17) While it might seem clear, given this language, that the FAA is meant to apply only to contracts involving transactions in commerce, such as contracts between companies or between producers and consumers, the Supreme Court has read the statute more broadly, gradually expanding the statute to encompass consumers and employees. (18) Moreover, despite the fact that the statute explicitly states that "nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce," (19) the Court has interpreted it to only exclude employment contracts that involve transportation workers. (20) As a result, the FAA has come to take on a life of its own, becoming the embodiment of the "liberal federal policy favoring arbitration agreements" (21) to the exclusion of both state and federal laws. (22)

      2. The NLRA

        Ten years after the passage of the FAA, Congress passed the Wagner Act, better known as the National Labor Relations Act. (23) This Act, which was intended to deal with many of the labor issues affecting a nation stuck in the rut of a depression, (24) addresses a variety of different labor problems including unions, union formation and bargaining, and employees' rights more generally. (25) In the sections most relevant to this Note, the statute states, inter alia, that "[e]mployees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection" (26) and that "[i]t shall be an unfair labor practice for an employer ... to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 157 [including the right to engage in concerted activities]." (27) This language, although arguably limited to protecting employees' union rights, (28) has been expansively interpreted, most notably in the context of the phrase "concerted activities," which is not explicitly defined by the statute. (29)

        For example, in Guernsey-Muskingum Electric Cooperative, Inc. the NLRB adopted the analysis of the trial examiner who concluded that a formal organization is not required and that concerted activity exists as long as "the matter at issue is of moment to [a] group of employees complaining and ... that matter is brought to the attention of management by a spokesman ... speaking for the benefit of the interested group." (30) Similarly, in Meyers Industries, Inc. the Board determined that concerted activity "encompasses those circumstances where individual employees seek to initiate or to induce or to prepare for group action, as well as individual employees bringing truly group complaints to the attention of management." (31) Moreover, the Board recently held that "an individual who files a class or collective action ... [clearly] seeks to initiate or induce group action." (32) Thus, the NLRB has understood the right to concerted activity to include the right to collective and class action lawsuits. (33) And although the NLRA has undergone multiple amendments since its adoption in 1935, (34) the aforementioned provisions have remained unchanged (35) and continue to play an important role in the ongoing debate over the enforceability of collective action waivers. (36)

        The NLRA also established the National Labor Relations Board, (37) which is given the power to "make, amend, and rescind ... such rules and regulations as may be necessary to carry out the provisions of [the NLRA]." (38) This gives the NLRB broad authority to manage labor affairs, especially the relationship between employers and employees. (39) Indeed, one of the NLRB's two main functions is "to prevent employers and unions from engaging in unfair labor practices." (40) In order to accomplish this function the NLRB has also been given the power to investigate charges alleging unfair labor practices and to fashion remedies if the charges are found to be meritorious. (41) In the event that an employer refuses to abide by the NLRB's remedy, the NLRB can then petition a U.S. court of appeals for a decree enforcing the NLRB's order. (42) Moreover, the NLRB has great discretion when interpreting the NLRA. (43) Thus, there are many circumstances in which the meaning of an NLRA provision takes its guidance...

To continue reading

FREE SIGN UP