The U.S. Supreme Court decided today:  employers may require employees to arbitrate claims only on the employee’s own (individual) behalf – I.e., no class actions. This opinion in Epic Systems Corp. v. Lewis, settles a recent dispute about whether the National Labor Relations Act (NLRA) precludes such class action waivers.  This decision reaffirms California arbitration law, and it does not affect the non-arbitrability of “PAGA” type claims. (PAGA claims escape arbitration because they are brought on behalf of the State rather than the individual who signed the arbitration agreement).

A little background – The NLRA has been around for about 80 years, about 10 years less than the Federal Arbitration Act.  The U.S. Supreme Court held in 2010, in Stolt-Nielsen S. A. v. AnimalFeeds Int’l  Corp., 559 U. S. 662, that arbitration agreements may require arbitration of individual claims only, effectively precluding parties to such agreements from bringing class actions.  But the Court did not address the NLRA in Stolt-Nielsen, which wasn’t even an employment law case.  

Before 2012, the National Labor Relations Board (the agency that enforces the NLRA) had never held that workers have a right under the NLRA to file class action lawsuits, based on the theory that doing so is NLRA-protected, “concerted activity.” But after the Supreme Court’s Stolt-Nielsen decision, the Board decided in a case called “D.R. Horton,” that the NLRA precluded class action waivers in arbitration agreements. The Board’s decision effectively removed Stolt-Nielsen from employment cases.  

In the years following the NLRB’s D.R. Horton decision, the federal appellate courts split on whether the NLRB was right. So, finally, the U.S. Supreme Court weighted in to address the split.  

With that background, here’s what the Court had to say

The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA—much less that it manifested a clear intention to displace the Arbitration Act. Because we can easily read Congress’s statutes to work in harmony, that is where our duty lies. 

As a result, unless or until Congress and a president pass a law, employment arbitration is legal and may exclude class actions.  Justice Gorsuch wrote the opinion for the 5-4 majority.  Justice Ginsburg, joined by Kagan, Sotomayor and Breyer, dissented.  

What about California?

Well, first of all, the California Supreme Court already held in its watershed Iskanian case that class action waivers are permissible. The Court expressly rejected the NLRB’s D.R. Horton ruling, in which the Board had held class actions waivers violate the NLRA.  But the U.S. Supreme Court’s decision today in Epic Systems precludes the California Supreme Court from backtracking if it had a mind to do so.

Second, this case should signal to the California legislature that its next attempt to outlaw mandatory arbitration will be buzz-sawed by federal law. I say this because there’s a bill pending this year to, once again, try to limit arbitration of employment disputes.

Finally, this decision does nothing to change the law regarding arbitration of claims under “PAGA,” the Private Attorney General Act.  Under PAGA, a plaintiff-employee brings a claim on behalf of the state Division of Labor Standards Enforcement.  PAGA claims are typically for certain penalties that, previously, only the state could collect.  An arbitration agreement cannot require arbitration of PAGA lawsuits, ostensibly because the “private attorney general” is suing on the state’s behalf, and the state was never a party to the arbitration contract.  PAGA claims therefore remain non-arbitrable under a typical pre-dispute arbitration agreement.  But when PAGA claims are mixed with a wage-hour class action for back wages, such as meal period premiums or overtime, the non-PAGA portions of those cases should remain arbitrable, while the PAGA claim will be resolved in court.

So, class action waivers are legal until Congress says they’re not.  Employers should evaluate whether to implement arbitration agreements. Of course, there are many pros and cons to doing so, requiring careful analysis. But this Supreme Court decision is a serious “pro” favoring arbitration agreements.

The case is Epic Systems Corp. v. Lewis and the opinion is here.   

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