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Avoiding Employee Class Actions: Arbitration Revisited

Employers should give arbitration programs a fresh look. Those who already use arbitration agreements to cover disputes with their employees should consider whether they need updating. Those not using arbitration agreements may wish to explore at least a partial program to cover the types of disputes most likely to result in class actions: wage and hour claims.

Many employers have eschewed arbitration programs, perhaps because one traditional rationale for arbitration –cost-savings– may have largely evaporated. Not only have arbitration fees gotten steeper, but the degree of permissible discovery (the expensive pre-trial exchange of information between the parties) has expanded in arbitration proceedings as well. Moreover, employers are sometimes forced to litigate with an employee over whether the arbitration agreement is enforceable. Consequently, arbitration does not always guarantee a cheaper and quicker resolution than might be achieved in court. At the same time, some employers have concluded that the arbitration process is less desirable than the court system, theorizing that judges may be willing to enter summary rulings against employees, while arbitrators have a reputation for reaching compromise decisions. (Granted, that sentiment is not universal; many employers have decided they are more comfortable with an arbitrator than the prospects of an emotional, “runaway” jury.) Another potential drawback to arbitration (or benefit, depending on one’s perspective) is its limitation on appeal rights.

Regardless of an employer’s calculus in past years on this issue, recent developments may warrant a re-assessment. The U.S. Supreme Court (in a case called AT&T Mobility LLC v. Concepcion) recently upheld the enforceability of class action waivers contained in arbitration agreements. Such provisions require that any dispute be brought individually before an arbitrator, preventing multiple-plaintiff actions either in court or arbitration. That decision comes on the heels of a ruling last year (in a case called Stolt-Nielsen S.A. v. AnimalFeeds Int’l), in which the high court concluded that an arbitration agreement’s silence about aggregating multiple parties’ claims did not permit class arbitration.

In short, an arbitration agreement may allow employers to avoid what many fear most: a financially crippling class (or collective) action brought by a large group of employees. That would be no small feat. Although Wal-Mart recently dodged a massive gender-discrimination class action, employers should not be lulled into believing that multiple-plaintiff cases are going away. Pay disputes, in particular, lend themselves to class treatment. Indeed, wage and hour class actions now outpace all other workplace class actions combined. In recent months, these types of suits have targeted venerable companies such as Starbucks, Sears, and Nordstrom – just to name a few.

The reasons for the explosion in wage and hour class actions are many. For one, violations of wage and hour laws are becoming easier for employees to identify. In this technological age when people can work remotely at any hour, and when workers can download time-tracking “apps” to their smart phones, the risk of an “off the clock” lawsuit is as real as ever. In addition, companies continue to misunderstand or ignore the overtime exemptions, as well as the line between independent contractors and employees, creating the danger of “misclassification” claims. At the same time, the Obama administration has made this area a high priority — with increased funding for enforcement activity. Meanwhile, the incentives that wage and hour class (and collective) actions offer plaintiffs’ lawyers are significant, including double-damage penalties, interest, and substantial attorney’s fee awards.

In this environment, any business with a sizable workforce should weigh the possible benefits of a program that, at a minimum, requires pay disputes to be decided on an individual basis and by an arbitrator. Such a program could funnel those disputes through internal complaint procedures first, before reaching arbitration, thus allowing management to address and correct legitimate pay issues. Notably, an arbitration program need not cover all types of employee claims, such as those arising out of hiring, termination and other employment decisions. Employers who wish to have the courts handle non-pay-related claims could still do so.

In order to be effective, any arbitration program needs to be carefully crafted. For instance, it must make clear that the employee voluntarily and knowingly agreed to it, ensure that the employer provided adequate consideration, and include terms that are even-handed. State laws vary on what must be present for these agreements to be deemed enforceable. Therefore, any company adopting an arbitration program should seek assistance from legal counsel.