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

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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