On May 21, the Supreme Court issued a 5-4 decision upholding the ability of arbitration agreements to limit collective or class-action claims. While the decision is controversial and was hotly debated by the Justices, it was hardly unforeseeable, given the increasingly expansive reading given by the Courts to the Federal Arbitration Act. Still, the decision is critically important for employers who feel they can limit their liability in employee lawsuits by forcing those employees into arbitration.

WHAT HAPPENED

In Epic Systems Corp. v. Lewis, the Court considered three cases in which employees who signed agreements with their employers consenting to individual arbitration of employment disputes sought to pursue collective or class action claims under the Fair Labor Standards Act (FLSA). The employees argued, consistent with the position recently taken by the National Labor Relations Board, that such collective actions are protected by Section 7 of the National Labor Relations Act, which gives employees the right to pursue complaints about working conditions collectively.

The majority of the Court disagreed, holding that the NLRA does not trump the Federal Arbitration Act, and that the arbitration agreements signed by the employees may be used to limit collective litigation. Thus, employees can waive their ability to pursue class action claims in favor of individualized arbitration.

WHY IT MATTERS

Virtually all laws protecting employees permit some form of class or collective action. Collective action is attractive to employees and plaintiff's lawyers because frequently the claims of individual employees do not involve enough damages to make litigation economically attractive or feasible. This is especially true in FLSA cases (which most frequently involve claims for unpaid overtime), where aggrieved employees sometimes find it extremely difficult to find representation for a lawsuit. Collective actions are also incredibly expensive for employers to defend, with significant time spent on attempts to de-certify the class of plaintiffs before you ever get to the real dispute. That increases the settlement value of such claims as employers seek to stop bleeding money in attorney fees.

The decision is also important because it generally bolsters the strength and enforceability of arbitration. The Epic Systems case means that lower courts may be less inclined to find inventive ways to work around arbitration agreements signed by employees.

WHAT IT MEANS FOR EMPLOYERS

Arbitration agreements aren't for everyone. Some employers feel that the cost of arbitration is unreasonably high, or they worry that arbitrators might not be as qualified to adjudicate disputes as are judges. However, arbitration is generally seen as a faster means of resolving disputes and far less likely than jury trials to lead to large judgments for employees. Now, the prospect of avoiding class action claims makes such agreements even more attractive, especially for mid- to large-sized employers who are more likely to face collective litigation.

Arbitration agreements aren't the only tool to avoid the risks of litigation. Mandatory mediation can help to resolve claims before they blossom into full litigation. Jury trial waivers are another effective way to control runaway verdicts. But it appears that only in the context of an arbitration agreement will employers have the opportunity to force their employees to deal with claims one at a time, rather than collectively.

If you have arbitration agreements with your employees, you should consider reviewing them closely to ensure that they limit collective actions. If you do not, it probably is worth your time to weigh the advantages and disadvantages of such agreements to determine whether they are an option you might want to implement to avoid potentially dangerous lawsuits.