Arbitration Agreements in the Wage-and-Hour Context

Only after class-related discovery has been completed, notice has been sent, and the period for class members to opt-in has expired, can the defendant seek to have the class decertified. Stage-two decertification holds the plaintiffs to a higher standard. But even if the case is decertified, the company has likely spent hundreds of thousands of dollars on legal fees defending a meritless allegation. In contrast, if the motion to decertify is denied, the class proceeds as a typical class action. The size of the class often results in significant financial exposure and corporate reputational damage. The cost of navigating this process is something every employer should seek to avoid. Though strong policies and compliance audits are essential, arbitration agreements could be a useful tool for some employers.

The Possible Benefits of Arbitration

Arbitration has many attractive characteristics: The process is often faster and less expensive than litigation. In addition to the typical efficiencies, arbitration in the FLSA context has a number of benefits. One significant benefit is that even though FLSA rights and claims cannot be waived through contract, the ability to pursue class arbitration can be waived. Waiver of traditional civil procedure creates the possibility of a process where an aggrieved individual is able to pursue recovery, but the scope of discovery and the scope of the claim may be far more focused and efficient than in full class action litigation.

Can Arbitration Agreements Limit FLSA Collective Actions?

Increasingly, the answer is “Yes.” Many courts have been willing to enforce properly drafted and implemented arbitration agreements to prevent FLSA single and collective actions. At its most basic level, an agreement to arbitrate is a contract between an employer and an employee. As such, the agreement must meet all the typical requirements of a contract: offer, acceptance, and consideration must exist, and the contract can be neither illusory nor unconscionable. These state-law issues will vary by jurisdiction and should be considered in the decision about whether to implement an arbitration agreement and how such a system would be implemented for a specific company.

At a more general level, at least four circuit courts of appeals have held that class FLSA claims can properly be resolved in mandatory individual arbitration proceedings and nearly all courts that have considered the issue have determined that the FLSA does not prohibit a waiver of the right to bring a collective action. See Adkins v. Labor Ready, Inc., 303 F.3d 496 (4th Cir. 2002); Carter v. Countrywide Credit Industries, Inc., 362 F.3d 294 (5th Cir. 2004); Bailey v. Ameriquest Mortg. Co., 346 F.3d 821 (8th Cir. 2003); Horenstein v. Mortgage Market, Inc., 9 Fed. Appx. 618 (9th Cir. 2001); Caley v. Gulfstream Aerospace Corp., 428 F.3d 1359 (11th Cir. 2005). Thus, the issue in crafting and implementing an alternative-dispute-resolution policy is ensuring that the technical requirements of a contract are met and issues relating to state-law unconscionability have been addressed.

Crafting a Defensible Policy

In Pomposi v. Gamestop, Inc., No. 3:09-cv-340, 2010 WL 147196 (D. Conn. Jan. 11, 2010), the United States District Court for the District of Connecticut determined that Gamestop did almost everything right. The opinion serves as a roadmap for employers to follow in creating or revising their own dispute resolution policy. The court noted several specific aspects of the policy and its implementation that employers should follow:

• Announce the policy in an appropriate open setting.
• Prepare written materials explaining the agreement.
• Use clear, unequivocal language in the agreement and any explanatory publications.
• Emphasize important terms, including the waiver of the right to a class action.
• Make sure not to affect the employee's substantive rights.
• Ensure employees sign an acknowledgement.

Any other efforts taken should be aimed at making the agreement either clearer or more beneficial to the employee. In addition to the steps outlined above, written opinions have noted additional steps that a company can take to support its use of a dispute resolution agreement to prevent FLSA collective actions.

In the agreement, it is helpful to be as explicit as possible. There are at least four additional topics that should be covered clearly.

First, referencing the FLSA and collective actions specifically can help ensure that the agreement is substantively fair and provides notice to the employee of all rights being waived.

Second, whether consideration and acceptance were sufficient are issues that can arise, so an agreement should discuss both topics. Jurisdiction-specific legal research should be done to determine whether continued employment is acceptable consideration or acceptance. If it is, make that fact explicit. If it is not, some other form of consideration ' a modest payment, for example ' will be required. An additional quality is to provide for the possibility of employees opting out. This feature prevents the employee from later arguing that the agreement was a contract of adhesion and was not accepted.

Third, an employer should consider cost. One basis for finding a dispute resolution agreement that waives class action rights to be procedurally unconscionable is that it precludes an employee from pursuing his or her individual claim, due to the low amount at issue. Though this is less of an issue in many wage claims, reducing the cost of arbitration is very helpful. For example, some employers provide cost-free arbitration or have a filing fee that is less than the fee charged by a court with jurisdiction. Other procedural hurdles that can be removed include requiring that the arbitration be within the same county as the employee's workplace and not requiring confidentiality.

Fourth, depending on which state's law applies, employers should be wary of using broad arbitration agreements that cover more than just FLSA claims; agreements should only apply to claims belonging to an employee. Some states like Maryland and Missouri have found arbitration agreements that only require the parties to arbitrate an employee's claims are unconscionable and unenforceable. In these states and others, arbitration agreements must be mutual, i.e., apply to claims by both an employee and an employer. This mutuality requirement highlights the role state law plays in whether an arbitration agreement is enforceable.

Finally, there are some key characteristics that should be included in any arbitration agreement between an employer and employee. The watershed California case, Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83 (2000), is instructive. There, the court held that to be enforceable, an arbitration agreement in the employment context must: 1) have no limitation on remedies; 2) allow for adequate discovery; 3) require a written arbitration award and permit judicial review; 4) impose no unreasonable costs or arbitration fees upon the employee; and 5) require a neutral arbitrator. These points from one of the more employee-protective jurisdictions should act as a good safe harbor for employer in other states.

Proper Implementation Is Key

An employer who chooses to adopt a strong dispute resolution policy must be careful to implement the policy correctly. To cover basic offer, acceptance, and consideration issues, an employer should announce the policy and explain it as effectively as possible. This can be achieved in any number of ways, but an employer should consider live presentations with simple, straight-forward handouts such as a list of frequently asked questions; a clear explanation in the agreement and associated publications that continued employment ' or another acceptable form of consideration ' is meant to be the full consideration for acceptance; and a signed dedicated acknowledgment that highlights the key waivers being made by the employee. It is critical to an arbitration agreement's enforceability that the signed acknowledgment highlights the waiver of both the right to a civil lawsuit and a collective action.

To avoid non-enforcement, it is advisable to prevent the agreement from being freely amendable by the employer without notice. This might mean that the arbitration agreement exists as a separate contract that is amendable only after sufficient notice has been communicated to all employees and applies only to issues that arise after the changes become effective.

In implementation, just as in drafting, the focus should be on effective communication of the process and its attributes: more methods of explanation will generally be better.

Dynamic, Changing Considerations

The ever-dynamic question of the enforceability of employee arbitration agreements ' particularly those in the context of pre-dispute employment matters ' remains subject to a great deal of discussion, judicial interpretation, and potential legislative action. Recently, before the most recent midterm elections, Congress was seriously considering the Arbitration Fairness Act of 2009. This proposed Act essentially would have found employer-initiated arbitration programs in the employment context to be unenforceable. In contrast, collective-bargaining agreements providing for agreements in arbitration would remain enforceable. The fact that the Arbitration Fairness Act of 2009 would have so radically changed this area is a clear indication of just how volatile this area is. In essence, this is an area of strong public-policy considerations. As noted, in this regard, keeping abreast of the changes in this area is critical. In addition, ensuring a full understanding of the process and mutuality in the agreement is a vital element.

In Stolt-Nielsen S.A. v. Animal Feeds International Corp., 130 S. Ct. 1758 (2010), the Supreme Court held that class arbitration must be consensual and, therefore, cannot be imposed upon parties when their contract is silent on the issues. See Samuel Estreicher and Steven C. Bennett, “Preemption of California's Standard of Review of Class Action Arbitration Waivers,” NYLJ, June 25, 2010. Under Stolt-Nielsen, parties could seemingly avoid class arbitration by omitting any reference to it in their arbitration agreement. Yet because the Court's earlier jurisprudence suggested arbitrators could find the authority to order class arbitration despite silence in the agreement, express prohibitions on class arbitration appear in many arbitration agreements. Such prohibitions have been the subject of scrutiny, particularly by state courts in California and New Jersey. Id.; Discover Bank v. Superior Court, 36 Cal. 4th 148 (Cal. 2005) (holding class-arbitration waivers are unconscionable in consumer adhesion contracts); Muhammad v. County Bank of Rehoboth Beach, Del., 189 N.J. 1 (2006) (holding payday loan contract unconscionable in light of class-arbitration waiver provision).

Notwithstanding the fluidity of the law in this dynamic area, the reality is there is much that arbitration offers in the context of wage-and-hour matters, both for corporate employers seeking to resolve matters on a more efficient basis and for individual employees who can often benefit from the expedited, focused nature of employment arbitration. The fluidity of the area simply illustrates how challenging it is to develop a program that is enforceable; the effective arbitration program is ever subject to careful review and revision consistent with current legal principles.

Conclusion

When the next wage claim comes, an effective arbitration agreement can help an employer avoid protracted, costly litigation while still giving the company a venue to defend its actions and policies. What is more, a well crafted and implemented policy will preclude the employee from pursuing collective relief for FLSA violations. Developing an effective arbitration process may prevent a company from being caught in the rising flood of expensive and time-consuming class action wage claims.

William C. Martucci, a member of this newsletter's Board of Editors, Brian P. Baggott, and Michael B. Barnett are in the National Employment Litigation and Policy Practice at Shook, Hardy & Bacon, L.L.P. in Washington, DC, and Kansas City, MO. Martucci may be reached at [email protected] or 202-783-8400; Baggott at [email protected] or 816-474-6550; and Barnett at [email protected] or 816-474-6550.

The remarkable rise in wage-and-hour litigation under the Fair Labor Standards Act (“FLSA”) ' and increasingly under state law ' over the past few years has been described as a “tsunami.” Nearly every day, news breaks of another multi-million-dollar, class-action settlement for unpaid overtime or alleged off-the-clock work. Wage-and-hour claims are a significant concern, due in part to the low standard to proceed to class discovery and the possibility of attorneys' fees accompanying any plaintiff's verdict. Discussions between employers and their counsel about wage-and-hour claims are common. For corporate attorneys, questions about how an employer can limit both the costs associated with and exposure to wage-and-hour claims have become ever more difficult. Employer-employee arbitration agreements may be part of the answer.

Defending an FLSA Collective Action

An employee who believes he or she has a claim for unpaid overtime, off-the-clock work, or one of many other protections offered by the FLSA may bring a case on behalf of all “similarly situated” employees. Rather than apply Rule 23 of the Federal Rules of Civil Procedure, the FLSA mandates a two-stage certification process under section 216(b) of the Fair Labor Standards Act. During the first stage, the named plaintiffs seek conditional certification, which provides them with the opportunity to send notice to putative class members and pursue discovery. The standard for conditional certification is very low, and it is typically granted. Plaintiffs must show only that putative class members had similar job requirements and pay provisions and that they were victims of the same company policy or practice. Importantly, once this requirement is met, the case proceeds to full class discovery.

Only after class-related discovery has been completed, notice has been sent, and the period for class members to opt-in has expired, can the defendant seek to have the class decertified. Stage-two decertification holds the plaintiffs to a higher standard. But even if the case is decertified, the company has likely spent hundreds of thousands of dollars on legal fees defending a meritless allegation. In contrast, if the motion to decertify is denied, the class proceeds as a typical class action. The size of the class often results in significant financial exposure and corporate reputational damage. The cost of navigating this process is something every employer should seek to avoid. Though strong policies and compliance audits are essential, arbitration agreements could be a useful tool for some employers.

The Possible Benefits of Arbitration

Arbitration has many attractive characteristics: The process is often faster and less expensive than litigation. In addition to the typical efficiencies, arbitration in the FLSA context has a number of benefits. One significant benefit is that even though FLSA rights and claims cannot be waived through contract, the ability to pursue class arbitration can be waived. Waiver of traditional civil procedure creates the possibility of a process where an aggrieved individual is able to pursue recovery, but the scope of discovery and the scope of the claim may be far more focused and efficient than in full class action litigation.

Can Arbitration Agreements Limit FLSA Collective Actions?

Increasingly, the answer is “Yes.” Many courts have been willing to enforce properly drafted and implemented arbitration agreements to prevent FLSA single and collective actions. At its most basic level, an agreement to arbitrate is a contract between an employer and an employee. As such, the agreement must meet all the typical requirements of a contract: offer, acceptance, and consideration must exist, and the contract can be neither illusory nor unconscionable. These state-law issues will vary by jurisdiction and should be considered in the decision about whether to implement an arbitration agreement and how such a system would be implemented for a specific company.

At a more general level, at least four circuit courts of appeals have held that class FLSA claims can properly be resolved in mandatory individual arbitration proceedings and nearly all courts that have considered the issue have determined that the FLSA does not prohibit a waiver of the right to bring a collective action. See Adkins v. Labor Ready, Inc. , 303 F.3d 496 (4th Cir. 2002); Carter v. Countrywide Credit Industries, Inc. , 362 F.3d 294 (5th Cir. 2004); Bailey v. Ameriquest Mortg. Co. , 346 F.3d 821 (8th Cir. 2003); Horenstein v. Mortgage Market, Inc. , 9 Fed. Appx. 618 (9th Cir. 2001); Caley v. Gulfstream Aerospace Corp. , 428 F.3d 1359 (11th Cir. 2005). Thus, the issue in crafting and implementing an alternative-dispute-resolution policy is ensuring that the technical requirements of a contract are met and issues relating to state-law unconscionability have been addressed.

Crafting a Defensible Policy

In Pomposi v. Gamestop, Inc., No. 3:09-cv-340, 2010 WL 147196 (D. Conn. Jan. 11, 2010), the United States District Court for the District of Connecticut determined that Gamestop did almost everything right. The opinion serves as a roadmap for employers to follow in creating or revising their own dispute resolution policy. The court noted several specific aspects of the policy and its implementation that employers should follow:

• Announce the policy in an appropriate open setting.
• Prepare written materials explaining the agreement.
• Use clear, unequivocal language in the agreement and any explanatory publications.
• Emphasize important terms, including the waiver of the right to a class action.
• Make sure not to affect the employee's substantive rights.
• Ensure employees sign an acknowledgement.

Any other efforts taken should be aimed at making the agreement either clearer or more beneficial to the employee. In addition to the steps outlined above, written opinions have noted additional steps that a company can take to support its use of a dispute resolution agreement to prevent FLSA collective actions.

In the agreement, it is helpful to be as explicit as possible. There are at least four additional topics that should be covered clearly.

First, referencing the FLSA and collective actions specifically can help ensure that the agreement is substantively fair and provides notice to the employee of all rights being waived.

Second, whether consideration and acceptance were sufficient are issues that can arise, so an agreement should discuss both topics. Jurisdiction-specific legal research should be done to determine whether continued employment is acceptable consideration or acceptance. If it is, make that fact explicit. If it is not, some other form of consideration ' a modest payment, for example ' will be required. An additional quality is to provide for the possibility of employees opting out. This feature prevents the employee from later arguing that the agreement was a contract of adhesion and was not accepted.

Third, an employer should consider cost. One basis for finding a dispute resolution agreement that waives class action rights to be procedurally unconscionable is that it precludes an employee from pursuing his or her individual claim, due to the low amount at issue. Though this is less of an issue in many wage claims, reducing the cost of arbitration is very helpful. For example, some employers provide cost-free arbitration or have a filing fee that is less than the fee charged by a court with jurisdiction. Other procedural hurdles that can be removed include requiring that the arbitration be within the same county as the employee's workplace and not requiring confidentiality.

Fourth, depending on which state's law applies, employers should be wary of using broad arbitration agreements that cover more than just FLSA claims; agreements should only apply to claims belonging to an employee. Some states like Maryland and Missouri have found arbitration agreements that only require the parties to arbitrate an employee's claims are unconscionable and unenforceable. In these states and others, arbitration agreements must be mutual, i.e., apply to claims by both an employee and an employer. This mutuality requirement highlights the role state law plays in whether an arbitration agreement is enforceable.

Finally, there are some key characteristics that should be included in any arbitration agreement between an employer and employee. The watershed California case, Armendariz v. Foundation Health Psychcare Servs., Inc. , 24 Cal. 4th 83 (2000), is instructive. There, the court held that to be enforceable, an arbitration agreement in the employment context must: 1) have no limitation on remedies; 2) allow for adequate discovery; 3) require a written arbitration award and permit judicial review; 4) impose no unreasonable costs or arbitration fees upon the employee; and 5) require a neutral arbitrator. These points from one of the more employee-protective jurisdictions should act as a good safe harbor for employer in other states.

Proper Implementation Is Key

An employer who chooses to adopt a strong dispute resolution policy must be careful to implement the policy correctly. To cover basic offer, acceptance, and consideration issues, an employer should announce the policy and explain it as effectively as possible. This can be achieved in any number of ways, but an employer should consider live presentations with simple, straight-forward handouts such as a list of frequently asked questions; a clear explanation in the agreement and associated publications that continued employment ' or another acceptable form of consideration ' is meant to be the full consideration for acceptance; and a signed dedicated acknowledgment that highlights the key waivers being made by the employee. It is critical to an arbitration agreement's enforceability that the signed acknowledgment highlights the waiver of both the right to a civil lawsuit and a collective action.

To avoid non-enforcement, it is advisable to prevent the agreement from being freely amendable by the employer without notice. This might mean that the arbitration agreement exists as a separate contract that is amendable only after sufficient notice has been communicated to all employees and applies only to issues that arise after the changes become effective.

In implementation, just as in drafting, the focus should be on effective communication of the process and its attributes: more methods of explanation will generally be better.

Dynamic, Changing Considerations

The ever-dynamic question of the enforceability of employee arbitration agreements ' particularly those in the context of pre-dispute employment matters ' remains subject to a great deal of discussion, judicial interpretation, and potential legislative action. Recently, before the most recent midterm elections, Congress was seriously considering the Arbitration Fairness Act of 2009. This proposed Act essentially would have found employer-initiated arbitration programs in the employment context to be unenforceable. In contrast, collective-bargaining agreements providing for agreements in arbitration would remain enforceable. The fact that the Arbitration Fairness Act of 2009 would have so radically changed this area is a clear indication of just how volatile this area is. In essence, this is an area of strong public-policy considerations. As noted, in this regard, keeping abreast of the changes in this area is critical. In addition, ensuring a full understanding of the process and mutuality in the agreement is a vital element.

In Stolt-Nielsen S.A. v. Animal Feeds International Corp. , 130 S. Ct. 1758 (2010), the Supreme Court held that class arbitration must be consensual and, therefore, cannot be imposed upon parties when their contract is silent on the issues. See Samuel Estreicher and Steven C. Bennett, “Preemption of California's Standard of Review of Class Action Arbitration Waivers,” NYLJ, June 25, 2010. Under Stolt-Nielsen, parties could seemingly avoid class arbitration by omitting any reference to it in their arbitration agreement. Yet because the Court's earlier jurisprudence suggested arbitrators could find the authority to order class arbitration despite silence in the agreement, express prohibitions on class arbitration appear in many arbitration agreements. Such prohibitions have been the subject of scrutiny, particularly by state courts in California and New Jersey. Id. ; Discover Bank v. Superior Court , 36 Cal. 4th 148 (Cal. 2005) (holding class-arbitration waivers are unconscionable in consumer adhesion contracts); Muhammad v. County Bank of Rehoboth Beach, Del. , 189 N.J. 1 (2006) (holding payday loan contract unconscionable in light of class-arbitration waiver provision).

Notwithstanding the fluidity of the law in this dynamic area, the reality is there is much that arbitration offers in the context of wage-and-hour matters, both for corporate employers seeking to resolve matters on a more efficient basis and for individual employees who can often benefit from the expedited, focused nature of employment arbitration. The fluidity of the area simply illustrates how challenging it is to develop a program that is enforceable; the effective arbitration program is ever subject to careful review and revision consistent with current legal principles.

Conclusion

When the next wage claim comes, an effective arbitration agreement can help an employer avoid protracted, costly litigation while still giving the company a venue to defend its actions and policies. What is more, a well crafted and implemented policy will preclude the employee from pursuing collective relief for FLSA violations. Developing an effective arbitration process may prevent a company from being caught in the rising flood of expensive and time-consuming class action wage claims.

William C. Martucci, a member of this newsletter's Board of Editors, Brian P. Baggott, and Michael B. Barnett are in the National Employment Litigation and Policy Practice at Shook, Hardy & Bacon, L.L.P. in Washington, DC, and Kansas City, MO. Martucci may be reached at [email protected] or 202-783-8400; Baggott at [email protected] or 816-474-6550; and Barnett at [email protected] or 816-474-6550.