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Courtroom litigation is extremely costly and collective or class actions astronomically increase these costs.  The Second Circuit Court of Appeals just gave employers a huge gift by allowing them to control some of these costs.   According to Sutherland v. Ernst and Young, employers can have employees sign agreements to waive their right to participate in class actions and employers can require employees to arbitrate claims under the Fair Labor Standards Act (FLSA), the federal law governing wage and hour issues.  This is a major victory for employers.

The Sutherland decision overturned an earlier Second Circuit decision rejecting such waivers on the grounds they prevented employees from effectively vindicating their rights under the FLSA.  The reason for the reversal was a recent U.S. Supreme Court decision, American Express Co. v. Italian Colors Restaurant, which held that making it more expensive to vindicate one’s rights (by prohibiting class actions) is not the same as depriving an individual from effectively vindicating her rights.  The Second Circuit determined that the American Express Co. decision applied here and unless the FLSA specified to the contrary (which it does not), courts should uphold an employee’s waiver of her rights to litigate in court and to participate in a class action.

Employers should consider whether to have all employees sign arbitration agreements containing class action waiver provisions.  Even employers who believe they are complying with the law often find out the hard way that they are mistaken.  And even employers who are fully compliant could still end up expending huge amounts of legal fees to prove their innocence.  While arbitration is not free, it is a huge savings over courtroom class actions.

However, these agreements do not absolve employers of all liability.  First, you must be in compliance with the law (or an arbitrator may force you to pay for your violation).  Second, an arbitration agreement will not protect employers from Department of Labor audits, state law claims (unless the state allows such waivers), or claims under statutes that courts interpret to prohibit such waiver.

Employers that choose to have employees sign arbitration agreements with class action waivers should consult with counsel regarding the details of the agreement.  While most employers have a significant opportunity to control costs, you and your counsel must decide if this is right for you.

Brody and Associates regularly advises management on complying with state and federal employment laws including wage and hour laws.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.