Split Circuit Court Decisions Create Uncertainty on Class Action Waivers and likely Supreme Court Review

By Vik Jaitly

Last week the 7th Circuit U.S. Circuit Court of Appeals, in Lewis v. Epic-Systems Corp., held that a company’s arbitration agreement, which prohibits employees from participating in “any class, collective or representative proceeding,” violated an employees’ right to engage in concerted activity under the National Labor Relations Act (NLRA).  The ruling creates a circuit split on the enforceability of class action waivers because the 2nd, 5th, and 8th Circuits each have held that class action waivers do not violate an employee’s rights under the NLRA.  Because of this circuit split, it is likely that the Supreme Court will visit this issue in the near future.

Background on Enforceability of Class Action Waivers

In recent years, federal courts have largely upheld arbitration pacts with class or collective action waiver language that provides that not only must an employee bring his or her claim exclusively in arbitration, but also that he or she must do so on an individual, and not on a class-wide basis. Specifically, in AT&T Mobility v. Concepcion (2011), the Supreme Court ordered the enforcement of arbitration agreements in a dispute involving an arbitration provision in cellphone contracts.  In the process, Concepcion generally held that the Federal Arbitration Act (FAA) preempts state bans on class action arbitration waivers.  The case however, did not directly address the viability of class action waivers in the employment context.

Shortly thereafter, in January 2012, the National Labor Relations Board (NLRB) ruled that an employer could not force its employees to sign arbitration agreements with class waiver provisions because such agreements were unlawful under the NLRA. See D.R. Horton, Inc., 357 NLRB 184 (2012).  On appeal, the 5th Circuit rejected the NLRB’s holding that class waivers in mandatory arbitration agreements are unlawful, joining the 2nd and 8th Circuits, which had issued similar rejections.

Seventh Circuit Opinion

In Lewis v. Epic-Systems Corp., the plaintiff had entered into an arbitration agreement with his employer in which he had waived his “right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”  Lewis later filed a suit in federal court on behalf of himself and other employees alleging that the company had violated the Fair Labor Standards Act (FLSA) by misclassifying the employees and depriving them of overtime.

The employer moved to dismiss plaintiff’s claims and compel arbitration on an individual claim basis. The plaintiff argued that the agreement’s class and collective action waiver was unenforceable because it interfered with his right to engage in concerted activity under Section 7 of the NLRA.  The district court agreed with plaintiff and denied employer’s motion to dismiss, relying primarily on a prior decision the district court had issued adhering to the D.R. Horton’s decision.  The district court believed the 5th Circuit’s majority opinion “never persuasively rebutted the board’s conclusion that a collective litigation waiver violates the NLRA and never explained why, if there is tension between the NLRA and the FAA, it is the FAA that should trump the NLRA, rather than the reverse.”  The employer subsequently appealed the district court’s decision to the 7th Circuit.

In its analysis, the 7th Circuit adopted the NLRB’s reasoning (as stated in D.R. Horton) that engaging in class, collective or representative proceedings is “concerted activity” and a protected right under Section 7 of the NLRA.  Therefore, the court concluded, it would be an unfair labor practice under Section 8 of the NLRA for an employer “to interfere with, restrain, or coerce employees in the exercise” of this right.

Surprisingly, the 7th Circuit rejected the argument that the arbitration agreement must be enforced under the FAA—an argument adopted by all the other circuits that have ruled on this matter. In its ruling, the court focused on the FAA’s savings clause, which provides that arbitration agreements are enforceable except if the agreements themselves are unlawful.  Thus, the court found that Epic’s arbitration agreement is illegal under the NLRA, and because an illegal agreement is not enforceable under the FAA’s savings clause, there is no conflict between the FAA and the NLRA.

General Takeaways for Employers

The Lewis decision leaves employers with several takeaways:  First, employer need to know that class and collective action waivers will not be enforced in federal courts sitting in Illinois, Indiana and Wisconsin, which are the states within the Seventh Circuit’s jurisdiction.

Second, these same agreements will likely continue to be enforced in federal courts sitting in the circuits that have rejected the NLRB’s reasoning in D.R. Horton (for now, 2nd, 5th, and 8th Circuits).

Third, this circuit split will likely involve the input of the Supreme Court in the future but perhaps not between the Presidential election, and the appointment of a ninth Justice, given the desire to avoid a 4-4 split. If the case is brought before the Supreme Court before a new Justice is confirmed by the Senate, and the Supreme Court decision is split 4-4, each of the Circuit’s decisions will remain in effect.

What Are Your Company’s Wage & Hour Risks?

Wage & Hour class actions are being filed at a pace that dwarfs almost all other types of litigation. With a myriad of federal and state laws and regulation, employers not only need to take steps to minimize the risk of a suit, but also must be prepared to defend themselves. Launch the brief video below to hear how Labor and Employment Group partners Cheryl Orr and Stephanie Gournis are helping employers involved in employment class actions, as well as helping companies to minimize the risk of litigation.

 

Wage-and-Hour

 

Unpaid Internships – Training Programs or a Lesson in Class Actions?

By: Kate S. Gold and Elena S. Min

Summer is quickly approaching, and eager students are lining up for internship opportunities, some of which may be unpaid.  The whole topic has caused a firestorm of news stories lately – including an NYU students’ petition to remove unpaid internship postings from the campus career center, and an auction by an on-line charity website for a six week unpaid internship at the UN NGO Committee on Human Rights (the current bid is $26,000).  Do unpaid internships run afoul of federal and state minimum wage laws?  The answer potentially is yes, but given recent successful challenges to class certification, employers now have useful guidance in developing defense strategies against such claims.

Last week, in Wang v. The Hearst Corporation, U.S.D.C. S.D.N.Y. Case No. 12-CV-00793, the court denied class certification in a case brought by interns at various Hearst-owned magazines.  The interns challenged Hearst’s practice of classifying them as unpaid interns, allegedly to avoid minimum wage and overtime laws under the Fair Labor Standards Act (“FLSA”) and New York state law.  The court found that the plaintiffs could not satisfy the commonality requirement for class certification.  While plaintiffs could demonstrate a corporate-wide policy of classifying proposed class members as unpaid interns, the nature of the internships varied greatly from magazine to magazine.  The court noted there was no evidence of a uniform policy among the magazines regarding the interns’ specific duties, training, or supervision.

Days later, attorneys for the defendant in Glatt v. Fox Searchlight Pictures Inc., U.S.D.C. S.D.N.Y. Case No. 11-CV-06784, made a similar argument to defeat class certification in a case in which Fox interns challenged their unpaid status under federal and New York state minimum wage and overtime laws.  In that case, the interns worked on the sets of different films or were based out of corporate offices, and weren’t governed by a centralized policy or procedure.  The defendant in Glatt argued that class certification should be denied because of the lack of a uniform policy.  While the court in Glatt has not yet ruled, these two cases suggest that, although claims by unpaid interns may persist, plaintiffs may find it increasingly difficult to sustain them as class actions.

In light of these cases, now is a good time to review the rules for internships.  According to the Department of Labor, internships in the for-profit private sector will be viewed as employment relationships for which the FLSA minimum wage and overtime rules will apply, unless the intern is truly receiving training which meets six criteria:  (1) the internship is similar to training that would be given in an educational environment; (2) the internship experience is for the benefit of the intern; (3) the intern is not replacing employees and works under close supervision; (4) the sponsor of the intern does not derive immediate benefit from intern’s activities and at times, its operations may actually be impeded; (5) the intern is not entitled to a job at the conclusion of the internship; and (6) the sponsor and the intern understand the intern is not entitled to wages for the time spent in the internship.  As of 2010, the California Division of Labor Standards Enforcement (“DLSE”) relaxed the multi-factor test it previously applied and now uses the same criteria as the DOL.

While the Hearst ruling is good news for employers, the case did not address the merits of the interns’ claims and does not mean employers can relax their compliance efforts.  If an employer improperly classifies an internship as “unpaid,” the employer could be liable for failure to pay minimum wage and overtime, penalties for failure to provide meal and rest breaks, as well as potential liability for violations of anti-discrimination and anti-harassment laws that apply to employees.  The bottom line is that employers should apply the DOL/DLSE six-factor test and if their internships do not meet the criteria, the interns should be paid at least minimum wage.

Editors note: Be sure to check out Kate’s guest blog post for thewrap.com on the use of interns by entertainment and media companies.

Supreme Court Ducks Mootness Question In Genesis

By: Jerrold J. Wohlgemuth

Does an unaccepted offer of judgment for full relief made prior to a motion to certify moot the plaintiff’s claim in an FLSA collective action?  That was the question we hoped the Supreme Court would answer in Genesis Healthcare Corp. v. Symczyk.  Unfortunately, the majority in the 5-4 opinion issued April 16 refused to decide that question, finding that the issue was not properly before the Court because the plaintiff had conceded her claim was moot in the district court and Third Circuit, and had not contested the issue in her opposition to the petition for certiorari.  While we now know from the dissent that Justices Kagan, Breyer, Sotomayor and Ginsburg would find that an unaccepted offer of judgment has no impact on the validity of the underlying claim, the majority opinion leaves unresolved a split among the Circuits.  The Seventh Circuit accepts the argument that a claim must be dismissed as moot when an offer of judgment for full relief is made prior to a motion to certify, while the Third, Fifth and Ninth Circuits allow plaintiffs to circumvent mootness by immediately filing a motion to certify (the Second and Sixth Circuits accept mootness but reject the argument that the case should be dismissed, finding instead that judgment should be entered for the plaintiff in the amount offered by the defendant).  Because the issue remains in doubt, Defendants in FLSA collective actions may prefer to pursue settlement with the individual plaintiff  before a motion to certify has been filed to end the claim, rather than make an offer of judgment, in order to avoid endless litigation over the impact of the offer.

To read our client alert for this case click here.

California Court of Appeal Finds Employment Arbitration Agreement Barring Class Claims Unconscionable

By: Fey Epling

In Compton v. Superior Court of Los Angeles County, No. B236669 (2d Dist. Mar. 19, 2013), a divided panel of the Second District Court of Appeal reversed the Los Angeles Superior Court’s order compelling arbitration of her wage-and-hour class action complaint.

The Compton majority found the arbitration provision was substantively unconscionable because it was “unfairly one-sided” for four reasons.  First, the agreement exempted the employer from arbitration for injunctive relief on claims related to confidential information and trade secrets.  The majority did not find the carve-out of plaintiff’s claims for workers compensation, unemployment and disability claims sufficient to create parity.  Second, the majority found the imposition of a one-year time limit to arbitrate employee claims impermissibly shortened the applicable statutes of limitations; for a separate, but related reason, the court found this limitation was unfairly one-sided when compared with the three- and four-year statutes of limitation applicable to the unfair competition and trade secret claims preserved by the employer.  Finally, the majority found that the attorneys’ fees language undermined the employee-favorable statutory fee provisions.  Of some concern, the court declined to sever the offensive terms, finding the agreement to be “permeated by unconscionability.”

In an apparent effort to distance its opinion from AT&T Mobility, LLC v. Concepcion (2011) 131 S.Ct. 1740 and its progeny, the Compton majority emphasized that the Concepcion opinion arose out of a consumer arbitration agreement.  The court specifically found that Concepcion “did not abrogate the Armendariz one-sidedness rule,” i.e., “the doctrine of unconscionability limits the extent to which a stronger party may, through a contract of adhesion, impose the arbitration forum on the weaker party without accepting that forum for itself.”  Armendariz v. Foundation Health Psychcare Servs. (2000) 24 Cal.4th 83, 118.

The Compton court found that the agreement was also procedurally unconscionable because, regardless of “how conspicuous the arbitration agreement’s terms and advisements,” the employer’s reported conduct (hurried presentation and signature requested) “rendered them nearly meaningless” and demonstrated oppression.  The court also found that the information provided was one-sided because it did not sufficiently set forth the rights that were being waived, and because the rules of the applicable arbitration bodies were not provided to the employees in toto.

As a procedural side note, the panel was divided even on the basis for consideration of the appeal.  The dissent found that the appeal was appropriate pursuant to the “death knell” doctrine, and the majority side-stepped the issue by addressing the issue as a petition for writ of mandate.

The dissent raises a host of issues and highlights the unsettled conflicts between the Concepcion line of cases and California’s unconscionability principles, which have arisen primarily in the context of employee and consumer lawsuits.

Given the strong language in Compton and the court’s refusal to strike out the offensive terms, California employers may wish to engage in a review of their arbitration agreements in light of the Compton majority’s opinion.

Editor’s Update:

On June 12, 2013, the Supreme Court granted defendant’s petition for review, but deferred all briefing and further action in the matter pending its disposition of Sanchez v. Valencia Holding Co., S199119, the leading case on the related issue of whether the Federal Arbitration Act, as interpreted in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ___, 131 S.Ct. 1740, preempt state laws invalidating mandatory arbitration provisions in a consumer contract on grounds of procedural and substantive unconscionability.

Would Your Wage and Hour Practices Withstand Scrutiny?

By: Laurie A. Holmes

These are real headlines from the last four days:

  • Holiday Inn at LA Airport Hit with Wage Class Action
  • Bath & Body Works Will Pay $1.3M to End Managers’ Wage Suit
  • Texas Sales Managers Hit Gold’s Gym with Overtime Suit
  • FedEx to Pay $10M to Settle OT, Meal Break Suit
  • Kraft Paying $1.75M to Settle Sales Workers’ OT Suits
  • ZipRealty Pays $5M to Settle California Agents’ Wage Claims

Similar headlines from the last two weeks would fill this screen.  And these headlines do not reflect a new trend – rather, they are just examples of the many similar headlines featured almost daily in Labor and Employment publications.  In fact, a record number of wage and hour lawsuits have been filed in the last 18 months.  And there’s no sign that they will be dwindling any time soon.

Why are these suits here to stay?  For one, with the availability of attorneys’ fees and liquidated damages, they’re a boon for plaintiffs and their lawyers.  For another, given economy-driven layoffs, potential plaintiffs may end up in lawyers’ offices more often, looking for ways to strike back.  And don’t think you’re protected just because the former employee signed a severance agreement.  Employees cannot release wage and hour claims, even if your agreement says otherwise.  Perhaps most compellingly, the Fair Labor Standards Act is not the easiest law to comply with.  Ever try to compute the regular rate when non-discretionary bonuses are paid every week and the amount varies?  Do you really know what “independent discretion and judgment” is?  Do you know if you need to count the time employees spend at home checking their email as “time worked”?

What are the most popular practices targeted by plaintiffs?

  • Failure to pay overtime – either because the employer doesn’t like paying overtime or because employees are misclassified as exempt.
  • Failure to pay overtime at the proper rate.
  • Paying workers less than the minimum wage, especially tipped workers.
  • Failure to provide uninterrupted meal breaks of the appropriate length.
  • Retaliation against workers who complain.

What should you do?  Short of making everyone non-exempt and prohibiting overtime, ask yourself how confident you are that your classifications are correct.  If you’re not confident, call your lawyer and schedule an audit.  Review a sampling of time and pay records to ensure that overtime was properly calculated and paid.  Not sure?  Call your lawyer.  Don’t have time records?  Groan.

Finally, don’t think you’re safe because your company is not big enough to be on anyone’s radar screen.  Ever heard of 888 Consulting Group?  Savvy Car Wash?  Geosite Inc.?  Quicksilver Express Courier Inc.?  ZipRealty?  Me either.  But all of these companies have been hit with wage and hour suits.  You may not be able to avoid being sued, but an FLSA audit before that happens could help you minimize the damages.