As any employer who has gone through a class action lawsuit for alleged wage and hour violations can verify, the experience can be a nightmare.

It starts out innocuously enough: a lawyer serves a lawsuit on behalf of one or more current or former employees claiming they were not paid overtime either because they were misclassified as exempt employees or as independent contractors, or because certain break time, wait time or travel time was not counted as time worked in computing overtime computation. But the lawsuit purports to be not only on behalf of the named plaintiffs but also on behalf of “all other similarly situated employees” and seeks collective action or class certification from the court.

This raises the ante considerably: if the number of employees in the sought-after class is, say, over 50, the amount of potential claimed owed wages becomes exponential. To this is added “liquidated damages” (a penalty amount equal to the amount of wages claimed), plus payment of the plaintiffs’ attorneys’ fees.

In this way, the potential exposure easily reaches the six figure range. Although the employer considers the situation outright legal blackmail, the risks and costs of litigation force a choice of either expending large amounts on legal fees fighting the claim or agreeing to a large settlement.

It is no wonder, then, that the number of wage and hour class action suits has increased significantly over the last several years. According to one study, 7,064 federal wage and hour cases were filed in the year ending March 31, 2012, at least double the number filed in the year ending March 31, 2005.

Relief on the horizon?

Last year, the United States Supreme Court issued a decision, AT&T Mobility LLC v. Concepcion, that perhaps signaled the availability of a prophylactic measure for proactive employers hoping to avoid exposure to these lawsuits. In Concepcion, the Supreme Court held that the Federal Arbitration Act preempted a California ban on class action waivers in consumer arbitration agreements.

Based on the Supreme Court’s reasoning, some commentators noted that the same green light should be given to class action waivers in the employment context as well. Employers could require employees to sign employment agreements requiring, as a condition of employment, that disputes over wages be resolved through binding arbitration rather than courts, and further requiring that they be resolved on an individual basis only, waiving the right to participate in class or collective actions.

In fact, since Concepcion several courts have upheld arbitration agreements containing class action waivers in the wage and hour context, reasoning that there was no substantive right in the wage and hour laws that prohibited such waivers.

The National Labor Relations Board earlier this year appeared to muddy the waters. The NLRB held that the right to bring a class or collective action was not merely a procedural right, but a substantive right of employees guaranteed by the National Labor Relations Act as a form of protected concerted activity. On that basis, it invalidated the class action waiver at issue as violating the NLRA.

Whether the NLRB’s position will be followed by the courts is still an open question, and indeed some courts already have rejected it, while others have not. Even though the federal Court of Appeals that sits in Chicago has not as yet weighed in on the subject, recently one federal judge in Chicago observed that the federal wage and hour laws do not prohibit contractually waiving the procedural right to join a collective action.

While the legal landscape is not yet resolved, it seems favorable enough that employers may want to consider adopting arbitration policies that waive the right to class or collective actions under the wage hour laws. However, there are pros and cons to consider in doing so.

Pros

  • Reduction of overall cost and exposure. The waiver of the employees’ right to participate in collective or class actions limits the employer’s liability exposure in the arbitration proceeding to that of the individual employee’s claims. Instead of having to pay the court costs and legal fees of defending in court against a whole “class” of claims, the employer’s expenses relate to defending against a single claim in arbitration. This makes settlement less complicated as well, as again the focus is on an individual claim.
  • No jury trial. Plaintiffs in wage and hour lawsuits brought in court are entitled to demand a jury trial (provided their cases survive motions to dismiss or for summary judgment). Jury trials are more expensive and less predictable than judge trials or arbitration hearings. Additionally, juries may be more sympathetic to the employee than the employer.
  • Privacy. Arbitration hearings are private, and therefore there is less opportunity for publicity, negative or otherwise. Documents are not publicly filed, and it can be arranged that the arbitrator’s findings are sealed with only the outcome being made public.
  • Control over selection of the fact finder. Cases filed in court are assigned to a randomly-selected judge, who will preside over the case. With arbitration, the parties jointly select an arbitrator. Normally, arbitrators are selected for their expertise in the field.
  • Faster resolution. Discovery is a prime reason why class action cases are so expensive. Discovery disputes are time consuming and usually have to be briefed to the judge. In arbitration, discovery usually is more circumscribed, and arbitrators can and often do resolve disputes over the telephone. The arbitration hearing can be scheduled and completed more quickly as well. The process as a whole is less formal and generally takes place in a conference room, not a courtroom.

Cons

  • Loss of advantages of class actions. One advantage of a class action for employers is that it resolves a dispute affecting an entire class of persons in one fell swoop, without the employer having to worry about having to fend off a series of copycat claims. Except for those who, upon notice, opt out (in class actions) or do not opt in (in collective actions), the decision or settlement is binding on everyone who falls within the court-approved description of the class. With arbitration and class action waivers, this potential benefit to employers may be lost. On the other hand, if the employer gets a good result in the initial individual arbitration case, it may serve to dissuade others from bringing the same claim, perhaps effectively achieving the same effect.
  • No right of appeal. One of the common features of arbitration is that the arbitrator’s decision is final and binding, with no right of appeal. This can mean that the employer may effectively be stuck with a bad decision, no matter how poorly reasoned it may be. In court proceedings, there is always a right of appeal.
  • Curtailment of motion practice. In court proceedings, judges can and often do decide cases on dispositive motions, such as motions to dismiss or motions for summary judgment. In arbitration, the tendency is just to let cases proceed to live testimony.
  • Tendency to admit all evidence. In court proceedings, the judge will exclude evidence that is irrelevant or otherwise inadmissible. Arbitrators sometimes tend to just let the evidence in.

If an employer is considering adopting or modifying an employment agreement to provide for arbitration of wage disputes with class action waivers, seeking the advice of counsel on how to draft it is a prudent strategy as the risks can be high that the agreement may be challenged by a lawyer seeking to bring a class action suit.
Irving M. Geslewitz is a principal in the labor and employment group of Much Schelist. He can be reached at 312-521-2414 or igeslewitz@muchshelist.com.

This alert is intended for general information and should not be taken as specific legal advice.

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