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'Waiving' Goodbye to Class Actions

By Michael C. Schmidt
May 26, 2010

It is no secret by now that employers, particularly those in such industries as the financial services, retail and health care, continue to be hit with the legal tsunami that is class action lawsuits. Employers are especially vulnerable, with limited defenses when it comes to wage and hour lawsuits, where a large class of employees alleges that their employers failed to pay minimum wage or overtime compensation. That vulnerability has been increased recently by the current economic climate, where employers look for ways to cut certain employee-related costs, and by advances in technology (e.g., the use of BlackBerries) that make it more difficult to monitor working hours and activities.

Internal Policies

One way to reduce potential exposure for alleged wage and hour violations is to review the company's internal policies and practices to determine whether there are any compliance issues that should and can be addressed before a lawsuit is filed, or before a government agency commences an audit. Another option has been reaffirmed by a federal district court within the Second Circuit, which permitted an employer to obtain a written waiver prohibiting its employees from pursuing employment-related claims on a class-wide basis in court. Such a “class action waiver” may be a valuable strategy for limiting the significant exposure and leverage that is presented with class action lawsuits in this context.

The Class Action Dilemma

Wage and hour obligations are generally found in the federal Fair Labor Standards Act (FLSA), and in similar state and local laws. These statutes provide significant remedies for aggrieved employees, including compensatory damages equal to the amount of the unpaid wages, as well as additional statutory damages in certain cases equal to 100% of the unpaid wages (under federal law), attorneys' fees, interest, and costs. The potential monetary exposure increases exponentially because the federal and state wage and hour laws permit aggrieved individuals to bring these cases on behalf of themselves, and as representatives of a proposed class of other similarly situated employees.

For example, the FLSA authorizes multiple-plaintiff lawsuits as “collective actions.” A collective action under the FLSA is procedurally different from a traditional class action under Rule 23 of the Federal Rules of Civil Procedure (the procedural vehicle for prosecuting class-wide claims under state wage and hour laws). While members of a state Rule 23 class are bound by the outcome unless they choose to “opt out” of an action, potential parties to an FLSA collective action are instead required to “opt in.” Whether styled as a collective action or a class action, the impact is the same. Thus, because of the sheer number of individuals who can either opt in for federal collective action purposes, or who are included in a state class action merely by falling within the definition of a broad class of allegedly aggrieved workers, these collective and class actions generally increase the parties' litigation costs and present unique case management challenges for judges.

The Arbitration Dilemma

Companies often struggle with the threshold question of whether to require arbitration of employment disputes rather than proceed through the normal course of litigation in court. Whether arbitration is a desirable dispute resolution method invariably depends on the nature of the particular company and its workforce, and the types of employment disputes that the company views as likely to occur. For some, arbitration is viewed positively because of the potential for a less public, generally quicker and potentially less costly forum. On the other hand, arbitration is seen by some as less predictable in terms of the application of established precedent, more relaxed in terms of procedural and evidentiary rules that might not apply in arbitration to the benefit of an employee presenting his or her case, and much more difficult to obtain relief from a negative outcome.

The current state of the law generally favors reasonable agreements that require the submission of an employment dispute to arbitration. Indeed, back in 1991, the United States Supreme Court strongly approved arbitration of statutory claims in the leading case of Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). The Court in Gilmer (a case involving alleged age discrimination) “did not perceive any inherent inconsistency between those [important social policies underlying the employment statutes] ' and enforcing agreements to arbitrate age discrimination claims.”

Ten years later, in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), the Supreme Court again ruled that agreements to arbitrate employment disputes should be favored and are not unenforceable per se except in cases involving employment contracts of seamen, railroad workers, and similar laborers. While members of Congress have discussed potential legislation to prohibit the use of pre-dispute arbitration agreements in the employment context, unless and until that is done, courts are likely to continue to enforce arbitration agreements that are not determined to be procedurally or substantially unconscionable.

Favoring Class Action Waivers and Arbitration

As noted above, one potential strategy for reducing a company's exposure to a class-action lawsuit, particularly in the wage and hour context, is to require employees to submit such claims to arbitration, and further require that any arbitration proceed solely on behalf of the individual employee, rather than on behalf of a putative class. Recently, a federal district court in Connecticut, in the Second Circuit, upheld a company's use of a class-action waiver in an employment arbitration agreement, and provided guidance on how to create enforceable waivers.

In Pomposi v. Gamestop, Inc., 2010 WL 147196 (D. Conn. 2010), the plaintiff alleged that his employer failed to pay him minimum wage and overtime compensation in violation of the federal FLSA and Connecticut law. Prior to answering the complaint, the employer moved to dismiss the lawsuit on the basis that the plaintiff freely and voluntarily signed an agreement requiring the submission of any employment dispute to arbitration, and waiving his right to proceed as a class action.

Specifically, the employer created an internal dispute resolution referred to as “C.A.R.E.S.,” or “Concerned Associates Reaching Equitable Solutions.” The C.A.R.E.S. program set forth a mandatory three-step resolution procedure for any employment dispute. First, an employee can speak informally with a supervisor, manager, or Human Resources representative to resolve the dispute. Second, if that process is not successful, the issue will be reviewed and determined by an “Executive Review Officer” in the Human Resources Department. Last, if that step still does not resolve the issue, the dispute must be submitted to a neutral arbitrator for a final decision that is binding on both parties. Of critical import is that the rules and procedures of the C.A.R.E.S. program expressly provide that any disputes submitted to arbitration by an employee may proceed only as an individual claim, and that the employee agrees that he or she cannot bring any claims on behalf of a class of employees.

The district court granted the employer's motion, and compelled the employee to submit his dispute to arbitration solely on his own behalf. In reaching that decision, the court noted the existence of the following facts demonstrating that the C.A.R.E.S. program was reasonable and enforceable:

1. The C.A.R.E.S. program was presented to the company's workforce at a conference, during which all employees were given a brochure and handbook that described the program in detail, and in easily understood language. The class-action waiver included in the program documents was neither hidden nor obscure.

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