Texas Federal District Court Slaps U.S. Labor Department With Attorneys Fees for Unjustified Misclassification Case

April 17, 2014 by

In a win for every small business in the United States, a Federal Court near Houston sent a clear message to the government: don’t pursue a frivolous wage and hour case or you will pay the employer’s attorneys fees and expenses. The opinion by Senior Judge John D. Rainey ordered the U.S. Department of Labor (DOL) to pay $565,000 to a 37-member oilfield services company for a case that “should have [been] abandoned.” This latest decision, issued on April 9, 2014, followed an earlier decision that had dismissed all DOL’s misclassification claims and granted judgment to the employer.

 To grant the attorney fees and expenses, the Court relied upon the Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412, which was enacted in response to concerns that persons “may be deterred from seeking review of, or defending against, unreasonable governmental action because of the expense involved in securing the vindication of their rights.” To prevail on an EAJA claim, a private litigant must show several factors. Most importantly, it must have less than a $7 million net worth and less than 500 employees, win a final judgment against the government, and demonstrate that the position the government took in the litigation was “not substantially justified.” This is no easy task by any standard. But here, it was met and then some.

The Court unequivocally stated that “[h]ad the DOL interviewed more than just a handful of [the employer’s] roughly 400 gate attendants before presenting [the employer] with a $6,000,000.00 demand and filing its Enforcement Action against [the employer], it would have known the gate attendants were not employees. Once discovery revealed the facts cited in the paragraph above, the DOL should have abandoned this litigation.”  This sends a strong message, one we hope the government hears.

As a practical matter, however, the likelihood of this decision causing a sea change in such overbearing enforcement efforts is unlikely for the time being. While it may cause DOL to pause when approaching a small business in this manner, this case is no deterrent for the pursuit of larger businesses.  This brings us to the more important point.  The facts in this case show that DOL prejudged the case, repeatedly ignored the facts, and couched its case in terms only favorable to its improper position, something it continued to do even after it lost.  While government investigators and lawyers are bound by a code ethics that requires them to seek justice, the system somehow miserably failed here.  It is most unfortunate that, in this author’s experience, this sad state of affairs is not unique.

For this reason, we are happy to stand together as part of the Wage and Hour Defense Institute (WHDI).  WHDI relishes its role and our collaboration as a bulwark against such government overreaching and, with time and diligence, is working to ensure the right result in wage and hour matters for our business clients.        

The case is Gate Guard Services L.P. v. Thomas E. Perez, Secretary of Labor, United States Dept. of Labor (S.D. Tex., April 9, 2014), and the author is Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Houston, Texas.

President Obama Sics The DOL On Corporate Profits, Says Reduce The Number Of Exempt Workers And Pay More Overtime

March 14, 2014 by

By: Jason E. Reisman, Obermayer Rebmann (3/14/14)

Just when you thought it was safe to go back in the water … or at least thought you might be getting a handle on the highly technical and nuanced regulations under the Fair Labor Standards Act governing the “white collar exemptions,” President Obama is instructing the Department of Labor to revamp those regulations to ensure that more American workers are eligible for minimum wage and overtime pay.

It’s been reported that today the President will direct the DOL to begin the process of revising the regulations governing the “white collar exemptions”—clearly, an endeavor to combine his efforts to increase to the minimum wage with a broadening of the types of workers who will be entitled to receive the minimum wage and also overtime pay. As you may recall, the white collar exemption regulations were last revised in 2004, which was about 50 years after the prior substantive modification. These regulations define the requirements for specific white collar exemptions and generally apply to those executive, administrative, and professional employees who are paid a minimum weekly salary amount of $455/week, are paid on a salaried basis, and primarily perform duties in line with those described in the regulations. By meeting the requirements of one of the white collar exemptions under the FLSA, a worker is “exempt” from receiving minimum wage and also from receiving overtime pay for hours worked in excess of 40 in a work week. (Note: In states that have minimum wage and overtime laws, to be exempt, an employee must meet the state law requirements as well.)

From the news reports, it sounds like the President has two basic changes in mind:

1. Raising the minimum salary amount that applies to most of the white collar exemptions. The President seeks to substantially increase the current $455/week salary requirement, possibly more than doubling it.

2. Changing the duties requirements. Word has come from the White House that abuse is rampant among employers for using the “primary duty” test (i.e., the duty that is most important or is the principal function) to treat workers as exempt from overtime pay even though they only perform that duty less than 50% of the time. For example, retail store supervisors whose primary duty is to oversee and manage the store may very well spend more than 50% of their time assisting customers and making sales; however, that supervisor can still be exempt under the regulations if her/his “primary duty” is to manage the store (performing duties such as hiring, disciplining, firing employees; directing work; setting schedules; controlling the flow of inventory and supplies; and planning and controlling the budget). Apparently, the revisions contemplate ensuring that, to be exempt, workers must perform exempt duties at least a minimum percentage of the time.

This process and potential revision of these regulations is unlikely to happen quickly, as the DOL will need to evaluate the current regulations and draft proposed changes to meet the President’s goals, which will then be subject to public comment before final approval and issuance by the DOL. Regardless, for employers still not out of the woods from the economic downturn, the prospect of having more employees fall out from under these common FLSA exemptions could be harrowing for their future. Strong objection is expected from business and industry groups, especially as regulation changes often yield substantial increases in lawsuits (FLSA lawsuits have already increased more than 350% over the last dozen years) and DOL enforcement actions. We will continue to monitor this issue and provide further reports as it evolves.

Ninth Circuit Asks California Supreme Court to Clarify Suitable Seating Requirements

January 10, 2014 by

Last week the Ninth Circuit Court of Appeals asked the California Supreme Court to clarify how the state law requiring employers to provide workers with “suitable seating” should be applied.

California’s Industrial Welfare Commission wage orders require most employers to provide their employees with suitable seating “when the nature of the work reasonably permits the use of seats.”  This has been the law for decades, but the suitable seating requirement was little noticed until after the enactment of the California Labor Code Private Attorneys General Act of 2004 (the “PAGA”).  This law allows employees to sue their employers on behalf of themselves and other “aggrieved employees” for violation of labor laws, and allows prevailing plaintiffs to collect civil penalties that previously were available only in administrative enforcement actions brought by the state.  Under the PAGA, the civil penalty for violation of the suitable seating requirement is $100 for each aggrieved employee per pay period for the initial violation, and $200 for each aggrieved employee per pay period for each subsequent violation.

The two cases that triggered the Ninth Circuit’s request are Kilby v. CVS Pharmacy, Inc., 2013 BL 359084, 9th Cir., No. 12-56130; and Henderson v. JPMorgan Chase Bank NA, 2013 BL 359084, 9th Cir., No. 13-56095.

In Kilby, Nykeya Kilby brought a putative class action on behalf of a class of current and former CVS clerk/cashiers.  She alleged that during her employment at CVS she spent around 90 percent of her working time operating a cash register.  CVS has a policy of not providing seats to its cashiers because, in the company’s judgment, standing while operating the cash register promotes excellent customer service.  The district court found that the “nature of the work” performed must be considered, and that courts should consider an employer’s “business judgment” when considering the nature of the work.  The district court denied class certification because of differences in the duties of CVS cashiers, and granted summary judgment to CVS because many of Kilby’s duties required her to stand, CVS expects its cashiers to stand, and she knew of this requirement when she took the job.

In Henderson, four Chase bank tellers brought a putative class action on behalf of current and former Chase tellers.  They alleged they spent most of their working time standing at their teller stations servicing bank customers, but also performed a variety of additional duties away from their teller stations.  The district court denied class certification after finding that the nature of a teller’s work could vary based on the different tasks the teller performs away from the teller station, the bank at which the teller works, and which shift the teller works.

In both cases the plaintiffs appealed to the Ninth Circuit, contending that the district courts misapplied the suitable seating law.  In their view, if an employee is engaged in a task that can objectively be performed while seated, the employer must provide a suitable seat, and neither the employee’s other tasks, nor the employer’s business judgment, should affect the court’s determination of whether the nature of the work reasonably permits the use of seats.

The Ninth Circuit certified three questions to the California Supreme Court.  First, does the phrase “nature of the work” refer to individual tasks an employee performs during the day, or should it be construed “holistically” to cover the entire range of an employee’s duties?  Second, should an employer’s business judgment, the physical layout of the workplace, or the physical characteristics of the employee be considered when determining whether the nature of the work “reasonably permits” the use of a seat?  And third, does a plaintiff need to prove what could constitute “suitable seats” to show the employer has violated the law?

In certifying its questions to the California Supreme Court, the Ninth Circuit cited the potentially “dramatic” impact of the suitable seating law on California employers, stating that “tens of millions of dollars” are at stake in the Kilby and Henderson cases alone, depending on how the law is interpreted.  The Ninth Circuit wrote, “A definitive decision from the California Supreme Court would avert the potential uncertainty of federal courts and state courts adopting different interpretations . . . and would provide businesses in California with clear guidance on how to comply with the Wage Orders.”

The California Supreme Court could accept the Ninth Circuit’s invitation to clarify the law, or it could decline the request, leaving the responsibility for interpreting and applying the law with individual trial courts.

Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

Fifth Circuit Upholds Legality of Class Action Waivers in Arbitration Agreements

December 10, 2013 by

Last week the Fifth Circuit Court of Appeals held that the National Labor Relations Act (NLRA) does not prohibit arbitration agreements waiving the right of employees to pursue employment claims on a class or collective basis.  The court’s decision rejected last year’s ruling by the National Labor Relations Board (NLRB) that home builder D.R. Horton violated the NLRA by requiring its employees to sign such agreements.  The case is D.R. Horton, Inc. v. NLRB, 5th Cir., No. 12-60031, 12/3/13.

The underlying NLRB decision invalidating class and collective action waivers was issued on January 3, 2012.  The NLRB held that class actions qualify as “concerted activities for the purpose of collective bargaining or other mutual aid or protection….”  The NLRB reasoned that because the NLRA protects the right of employees to engage in such “concerted activities,” D.R. Horton violated by NLRA by requiring employees to waive their right to bring class actions.

In rejecting the NLRB’s analysis, the Fifth Circuit noted that while the NLRA protects concerted activity, there is nothing in the NLRA explicitly guaranteeing the right of employees to bring class actions.  Further, the court found no evidence that Congress intended the NLRA to override the Federal Arbitration Act (FAA), which generally mandates that arbitration agreements be enforced according to their terms.

Although many courts throughout the country have refused to follow the NLRB’s D.R. Horton analysis, the Fifth Circuit’s reversal of the actual D.R. Horton decision should seriously undermine the argument that the NLRA prohibits class action waivers in arbitration agreements.  The NLRB may no longer follow its own D.R. Horton analysis within the Fifth Circuit (Louisiana, Mississippi and Texas), and federal courts in other circuits have already displayed disfavor towards it.  The NLRB may simply abandon its D.R. Horton analysis, or it could petition the United States Supreme Court to review the Fifth Circuit’s decision.  Recent United States Supreme Court decisions, including AT&T Mobility v. Concepcion, have championed the FAA’s strong policy in favor of arbitration agreements—including agreements with class action waivers—so the NLRB is unlikely to find relief there.

Although this decision seriously undermines one argument against class action waivers, there are others that remain unsettled.  Employers considering whether to implement an arbitration program that includes class and collective action waivers should proceed with caution.

Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

State Farm Settlement Highlights How State Laws Can Trip Up Multi-State Employers

November 26, 2013 by

Earlier this month a federal district judge in Los Angeles approved a class action settlement in which State Farm agreed to pay $5 million to a class of 274 vehicle damage inspectors who alleged they were not paid for commuting between their California homes and vehicle inspection sites.  The case is Shiosaka v. State Farm Mutual Automobile Ins. Co., C.D. Cal., No. 2:12-cv-01268.

The home-based inspectors worked in the field, inspecting damaged vehicles and estimating repair costs.  They alleged that State Farm required them to drive company-owned vehicles between their homes and vehicle inspection sites, but were not allowed to use the vehicles for personal errands.  The inspectors further alleged that State Farm did not begin paying them for their time until they arrived at their first inspection site of the day, and stopped paying them when they left their last inspection site of the day to return home.  The inspectors claimed they worked an average of 1.75 hours per day for which they were not paid, most of which was attributed to commuting between their homes and vehicle inspection sites.  They sued for unpaid wages under both the FLSA and California state law.

Under the FLSA, State Farm had a good argument that the commute time was not compensable.  In 1996, Congress enacted the Employee Commuter Flexibility Act (“ECFA”), which provides that an employer need not compensate an employee for commute time, even when the employer requires the employee to use the employer’s vehicle as a condition of employment.  Courts interpreting the ECFA have held that the commute time remains non-compensable even when the employer prohibits the employee from using the vehicle for personal purposes.

But California law favored the employees.  Under California law, employees must be compensated for all time during which they are “subject to the control” of an employer.  California courts have held that when an employer requires an employee to take designated transportation to a work site, and the employee is foreclosed from activities in which the employee might otherwise engage if the employee was permitted to use the employee’s own transportation (such as personal errands), the employee is subject to the control of the employer and therefore must be compensated for that travel time.

State Farm agreed to pay $5 million to settle the case.  Vehicle inspectors in the settlement class will receive an average of $13,061 each.

This case is a good reminder that California and some other states have their own wage and hour laws that differ from the FLSA, and place substantially greater restrictions on employers.  These state laws can trip up even relatively sophisticated employers like State Farm that are based out of state and may not be familiar with state law requirements.  Employers with multi-state operations are well advised to familiarize themselves with applicable state laws and to make sure they are in compliance.

Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

Misclassified Paralegal Must Be Paid One And One-Half Times Her Regular Rate For All Overtime Hours

October 21, 2013 by

October 21, 2013
By Malani L. Kotchka, Lionel Sawyer & Collins

In Betty Black v. SettlePou, P.C., decided by the Fifth Circuit Court of Appeals on October 11, 2013, Betty Black was employed as a legal secretary and paralegal at the Dallas law firm SettlePou from 2005 through 2010. The law firm classified her as non-exempt while she worked as a legal secretary and a paralegal. However, in 2007, SettlePou told Black that she was supposed to supervise a legal secretary and, therefore, she would be reclassified as exempt. Since she no longer received overtime pay, Black complained both verbally and in writing to her supervising partner and to the Human Resources Director and said that she should be paid overtime for her extra hours worked. A jury found that SettlePou had willfully violated the Fair Labor Standards Act by misclassifying Black as exempt from overtime pay and that she was owed 274 hours of overtime pay. While the district court calculated Black’s overtime award using one-half of her hourly pay rate, the Fifth Circuit Court of Appeals decided that she should have been paid one and one-half times her regular work rate for all overtime hours because the fluctuating workweek did not apply to Black.

If an employee and employer agree that an employee will work whatever hours the employee is called upon to work in a workweek, then the payment for overtime hours should be at a rate not less than one-half the employee’s regular rate of pay. Black testified that it was her understanding that she would be compensated with a fixed weekly wage to work a regular schedule of 37½ hours per week even though she had been classified as exempt. The firm’s Human Resources Director testified that she, too, was unaware of any fluctuating workweek agreement with Black. Finally, a SettlePou partner testified that a full-time employee’s regular workweek at SettlePou was 37½ hours per week. The Fifth Circuit concluded that the parties’ testimony weighed in favor of finding that Black and SettlePou had agreed that Black’s weekly salary was intended only to compensate her for a regularly-set schedule of 37½ hours per week.

SettlePou argued that Black’s conduct in accepting her fixed weekly pay without additional compensation for hours worked above the standard workweek was conclusive of the fact that she understood and agreed that her fixed weekly salary would cover all of the hours worked on her varying schedule. However, the Court found that the fact that SettlePou paid Black a fixed salary for varying hours was not evidence that SettlePou and Black had agreed that a fixed salary would compensate her for all the hours she worked each week. The Fifth Circuit Court of Appeals concluded that Black’s immediate and repeated voicing of her disagreement with her lack of overtime pay after being reclassified as exempt showed that she did not agree that her fixed weekly salary was intended to compensate her for all the hours she worked each week. Therefore, she was entitled to one and one-half times her regular rate for her overtime hours. If an employer is going to use the fluctuating workweek as a method of paying for overtime, the employee must agree to this method of payment.

Employee’s Failure to Submit Accurate Time Record Helps Employer Establish Lack of Knowledge of Alleged Unpaid Work

October 11, 2013 by

Employers, frustrated at being sued for alleged off-the-clock work by employees who self-report their time, received some welcome news this week. The U.S. Supreme Court declined to review a decision holding that an emergency department nurse was not entitled to overtime pay for allegedly performing work that she never reported on her timecard. White v. Baptist Memorial Health Care Corp., 699 F.3d 869 (6th Cir. 2012). As a result, the original opinion by the U.S. Court of Appeals for the Sixth Circuit remains intact. It underscores that an employee is not entitled to additional compensation simply by claiming that he or she failed to accurately report all hours worked. Rather, the employee must also show that the employer knew or should have known that the employee was not compensated for work allegedly performed.

In this particular case, the disputed issue was compensation for alleged missed meal breaks. The employer, Baptist Memorial, permitted employees to take an unpaid 30-minute meal period as work demands allowed. The payroll system automatically excluded the meal period time from hours worked by an employee on his or her daily shift. Ms. White asserted that she occasionally missed meal breaks and did not receive compensation for the additional time worked. She argued that Baptist Memorial’s pay records were thus inaccurate and that she was entitled to proceed with her claim based on her recollection of the number of times she missed her meal period. Baptist Memorial countered with the following evidence:

  • The employee handbook provided that if an employee’s meal break was missed or interrupted because of a work-related reason, that the employee would be compensated for the time worked during a meal break.
  • Baptist Memorial employees were instructed to record all time spent performing work during meal breaks in an “exception log.”
  • White signed a document stating she understood the meal break policy and the exception log.
  • White recorded occasions where her meal break was partially or entirely interrupted in the exception log.
  • White stated that when she reported missing a meal break, she was compensated for her time.
  • At some point, White stopped reporting her missed meal breaks in the exception log.
  • White does not remember and did not keep records of when her meal breaks were allegedly interrupted and Baptist failed to compensate her.
  • White claimed that, on occasion, she told her supervisors that she did not get a meal break; however, she did not tell them that she was not compensated for missing her meal breaks.
  • In addition to the exception log, White was aware of Baptist’s procedure to report and correct payroll errors.
  • White stated that when she used this procedure the errors were “handled immediately.”
  • However, White did not utilize this procedure to correct what she now claims were interrupted meal break errors.

This was not a situation where Baptist Memorial prevented White from reporting overtime or was otherwise notified of White’s alleged uncompensated work. The Sixth Circuit framed the issue as: “[w]hether Baptist knew or had reason to know it was not compensating White for working during her meal breaks.” The court summarized similar cases from other jurisdictions as standing for the proposition that “[i]f an employer establishes a reasonable process for an employee to report uncompensated work time the employer is not liable for non-payment if the employee fails to follow the established process.” However, it is not safe for employers to rely solely on this principle. For now, such evidence is best treated as part of a defense to the often overlooked “knowledge” element that the employee must prove in an off-the-clock case. In this case, the Sixth Circuit, after discussing Baptist Memorial’s procedures for recording hours worked and White’s failure to use the system, concluded that “There is no way Baptist should have known [White] was not being compensated for missing her meal breaks.” In other words, by having a reasonable method for employees to report hours worked, Baptist Memorial was able to insulate itself from accusations that it knew or should have known that White was not being compensated for alleged missed meal breaks.

The Baptist Memorial decision (and cases cited therein) provides a road map enabling the employer to reduce the risk that employees, who self-report time, will be allowed to pursue off-the-clock claims. The road map consists of setting a clear policy on reporting all hours worked, getting employee acknowledgment of the policy, training employees on how the policy works, implementing methods for employees to submit exceptions or corrections if they believe they were not compensated for all hours worked, demonstrating that employees are paid for additional hours worked beyond their regular shift when they report hours worked on their time records or on exception sheets, and taking corrective action against any supervisor who is reported to have discouraged or retaliated against any employee for reporting hours worked.

Washington State Minimum Wage Will Increase to $9.32 Per Hour for 2014

October 11, 2013 by

Washington State’s minimum wage will increase to $9.32 per hour beginning January 1, 2014.

Washington is one of ten states that adjust their minimum wage annually based on inflation and the CPI. The others are Arizona, Colorado, Florida, Missouri, Montana, Nevada, Ohio, Oregon, and Vermont.

Washington has had and will continue to have the highest state minimum wage in 2014, followed by Oregon, which recently announced its 2014 minimum wage will rise to $9.10 per hour.

Washington’s minimum wage applies to workers in both agricultural and non-agricultural jobs, although 14 and 15 year olds may be paid 85% of the adult minimum wage, or $7.92 per hour in 2014.

Washington has at least one city, Bellingham, with a “living wage” ordinance setting a minimum wage for contract service providers that is higher than the state minimum wage. There is also a ballot initiative in the City of SeaTac that, if passed this November, would create a $15 an hour minimum wage for certain hospitality and travel-related businesses in the SeaTac airport area.

There is no change in the salary basis requirements for exempt employees. Washington’s “white collar” overtime exempt regulations are nearly identical to the pre-August 2004 U.S. Department of Labor federal regulations. Thus, the Washington minimum salary for an overtime exempt worker is $250 per week versus the current federal minimum of $455 a week. Since most employers and employees are subject to the federal FLSA, the federal minimum of $455 a week is required for nearly all “white collar” overtime exempt employees in Washington.

California Minimum Wage to Rise to $10 per Hour

September 26, 2013 by

Yesterday, Governor Jerry Brown signed legislation that will raise California’s minimum wage in two steps, from its current level of $8 per hour to $9 per hour on July 1, 2014, with a further increase from $9 per hour to $10 per hour on January 1, 2016.

The current California minimum wage of $8 per hour has been in effect since 2008.  The current federal minimum wage of $7.25 per hour is not scheduled to change, but since employers in California are subject to both the federal and state minimum wages, employees who work in California must be paid the higher of the state or federal minimum.  California’s minimum wage is therefore likely to control for the foreseeable future.

The minimum wage increase will affect not only low wage earners, but also salaried employees who are classified as exempt from overtime under any of California’s “white-collar” exemptions for administrative, executive and professional employees.  These white-collar workers must be paid at least twice the minimum wage per month, calculated based on full-time work (40 hours per week).  As a result, any increase in the minimum wage automatically increases the minimum salary for these white-collar exempt employees.

Since 2008, the minimum salary for white-collar exempt employees in California has been $33,280 per year, or $2,773.33 per month.  When the minimum wage goes up to $9 per hour on July 1, 2014, the minimum salary for administrative, executive and professional white-collar employees will increase to $37,440 per year, or $3,120 per month.  Any failure to pay the minimum required salary to these employees will render them nonexempt, and therefore subject to all overtime, meal period and rest period requirements.

California law does not allow the minimum salary to be reduced or pro-rated for those white-collar employees who work part-time.  As a result, part-time white-collar employees must be paid the minimum salary or more on a monthly basis, regardless of how many (or how few) hours they work.

Employers affected by the increased minimum wage should make sure any required changes—both to hourly pay rates and salaries (for full-time and part-time exempt employees)—are fully implemented by July 1, 2014 for the first increase to $9 per hour, and by January 1, 2016 for the second increase to $10 per hour.

Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

2nd Circuit Upholds Class Action Waiver to Preclude Collective FLSA Claims

August 23, 2013 by

By: Tracey Holmes Donesky and Christina Sans

On August 9, 2013, the Second Circuit applied the Supreme Court’s recent decision in American Express Co. v. Italian Colors Restaurant to hold that an employee cannot invalidate a class-action waiver in an arbitration agreement when the waiver removes the financial incentive to pursue a claim under the FLSA. The decision-Sutherland v. Ernst & Young LLP-is an important victory for employers because it confirms that the American Express holding applies to wage-and-hour claims, and held that there is no statutory “right” under the FLSA to collective action claims.

In American Express, the agreement between the credit card company and merchants included an arbitration clause, and provided that “[t]here shall be no right or authority for any claims to be arbitrated on a class action basis.” The merchants brought a putative class action alleging antitrust violations, and submitted evidence that the expert analysis necessary to prove their antitrust claims would cost at least several hundred thousand dollars, while the maximum recovery for an individual plaintiff would be $12,850, and under $40,000 even if trebeled.

The Supreme Court held that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim,” nor do such laws “evince an intention to preclude a waiver of class-action procedure.” The Court also explained that federal law does not secure a “nonwaivable opportunity to vindicate federal policies by satisfying the procedural strictures of Rule 23” or by invoking a class mechanism in arbitration. The merchants argued that the class waiver barred “effective vindication” of their federal statutory rights, because they had no economic incentive to pursue their claims individually. The Court recognized its prior decisions indicating that arbitration agreements could be struck down if they prevented effective vindication of statutory rights, but explained that this exception applied only when parties’ right to pursue a claim was affected. For example, the exception would apply if an agreement prohibited the assertion of certain claims, or if filing and administrative fees attached to arbitration made access to the forum impracticable. But financial impediments to proving a claim did not meet this exception.

American Express addressed antitrust claims, but the Court did suggest that its holding would apply equally to employment arbitration agreements. In reaching its decision, the Court noted that in Gilmer—a 1991 case under the Age Discrimination in Employment Act—the Court “had no qualms enforcing a class waiver in an arbitration agreement even though the federal statute at issue, the [ADEA], expressly permitted collective actions.”

The Second Circuit followed the Supreme Court’s directive. In Sutherland, the plaintiff-employee entered into an arbitration agreement with a class-action waiver at the time of hire. She subsequently brought a putative class action against her employer under the FLSA and New York Labor Law seeking to recover unpaid overtime wages. The employer filed a motion to compel individual arbitration. The employee argued that the costs and fees associated with prosecuting her claims individually would “dwarf her potential recovery of less than $2,000.” The district court was persuaded by her arguments and denied the employer’s motion.

The Second Circuit reversed. The court determined that the FLSA does not contain a “contrary congressional command” preventing class waiver. Although the FLSA specifically authorizes collective actions, the court noted that individual class members must affirmatively opt-in, and therefore an employee has the power to waive participation as well. The court noted that the FLSA collective action provision was akin to the collective action provision of the ADEA in Gilmer, and that the Third, Fourth, Fifth, Eighth and Ninth Circuits had all previously concluded that the FLSA does not preclude the waiver of collective claims. The Second Circuit determined that the employee’s “effective vindication” argument was precluded by American Express—the fact that individual arbitration would be prohibitively expensive does not permit a court to invalidate a class waiver. The court—like other courts to have addressed the issue—refused to follow D.R. Horton, Inc., in which the National Labor Relations Board (NLRB) held that a waiver of the right to pursue FLSA claims collectively in any forum violates the National Labor Relations Act (NLRA). The Second Circuit determined it owed no deference to the D.R. Horton opinion because the opinion trenched upon a federal statute and policy unrelated to the NLRA (the FAA).

The Southerland decision reaffirms the increasing body of caselaw upholding enforceability of class waivers in employment arbitration agreements. Importantly, class waivers can be enforced even if plaintiffs can establish that their costs would greatly exceed any recovery. Of course, employers and counsel should take care when drafting arbitration agreements to ensure enforceability. For instance, agreements may not be upheld if fees or other requirements make access to the forum impracticable. In Southerland, the court noted that the applicable arbitration agreement authorized the arbitrator to award a prevailing employee attorneys’ fees, as provided by applicable law or in the interests of justice. Such balancing provisions may also help ensure enforceability.


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