Seventh Circuit Finds Unlawful Mandatory Employment Arbitration Agreements with Class Action Waivers

The Seventh Circuit recently ruled that employment arbitration agreements containing class waivers are unlawful under the National Labor Relations Act. In doing so, the Seventh Circuit has created a circuit court split on this issue, since the Fifth Circuit had previously ruled that such waivers are lawful.

What you need to know:

In Lewis v. Epic Systems, 2016 U.S. App. LEXIS 9638 (7th Cir. May 26, 2016), the Seventh Circuit (which includes Indiana, Illinois and Wisconsin) denied an employer’s motion to compel arbitration, finding that the employer’s arbitration agreement was unlawful. Specifically, the court found objectionable the agreement’s provision which required certain groups of employees to bring any wage claims against the company through individual arbitration, rather than collective arbitration or other collective action.

In reaching its decision, the Seventh Circuit adopted a position that the National Labor Relations Board has advanced in several cases in recent years. Since its D.R. Horton decision, 357 N.L.R.B. 2277 (2012), the NLRB has repeatedly taken the position that arbitration agreements with class action waivers violate the NLRA, which gives non-supervisory employees the right to engage in concerted activity concerning the terms and conditions of employment. The NLRB reasoned that class actions are a form of protected, concerted activity. On appeal in D.R. Horton, Inc. v. NLRB, 737 F. 3d 344 (5th Cir. 2013), the Fifth Circuit rejected the NLRB’s argument, and affirmed the legality of such agreements. However, the NLRB was not dissuaded by the Fifth Circuit’s decision and has maintained that arbitration agreements with class action waivers violate the NLRA.

In its decision, the Seventh Circuit explicitly gave great deference to the NLRB in its interpretation of the NLRA, the statute it is tasked with enforcing. Therefore, the court ruled that class waivers such as the one in this case, violate employees’ right to engage in protected, concerted activity. Notably, the arbitration agreement in this case did not have an “opt-out” provision, which would allow employees to decline to sign the agreement but nonetheless keep their jobs. The Seventh Circuit specifically reserved judgment on the issue of whether an opt-out provision would change its analysis.

Most importantly, this decision creates a circuit split on an important issue, which tees this question up for review by the Supreme Court. In 2011, the Supreme Court split 5-4 in favor of commercial arbitration agreements with class action waivers in its decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). In that decision, late Justice Antonin Scalia voted that the arbitration agreement in question was enforceable. Given the current state of the Supreme Court, there is much greater uncertainty for employers as to whether the Supreme Court would find arbitration agreements containing class action waivers to be lawful.

What you need to do:

Until this issue is either resolved by the Supreme Court or addressed by other circuits, employers outside the Seventh Circuit can continue to use mandatory arbitration agreements with class action waivers. However, employers should be aware of the risk that, at some point in the near future, these agreements may be found unenforceable. Also, employers with a nation-wide workforce that includes employees in the Seventh Circuit should be aware of the potential risk that plaintiffs’ attorneys will target this jurisdiction as a venue for class action claims.

Employers in the Seventh Circuit who use arbitration agreements that contain class action waivers and do not have opt-out provisions should revise their agreements. For the time being, employers could remedy the issue of potential unenforceability by allowing employees the option to keep their jobs even if they decline to sign the agreement.