Timothy Barber
Timothy Barber

7th Circuit: Wisconsin Employer’s Class and Collective Action Waiver Violated NLRA

October 12, 2016

The National Labor Relations Board (NLRB) has taken the position that arbitration agreements that require employees to waive their right to participate in collective or class actions violate the National Labor Relations Act (NLRA). Federal courts are split on the issue, with some ruling that the Federal Arbitration Act (FAA) takes precedence over the NLRA and that the waivers are enforceable. 

In a recent decision, the 7th Circuit adopted the NLRB’s position and ruled that class and collective action waivers violate Sections 7 and 8 of the NLRA and are not saved by the FAA. In so holding, the 7th Circuit created a circuit court split, which means the U.S. Supreme Court will likely decide the issue.

Wisconsin Company Seeks to Enforce Broad Waiver

Epic Systems makes software for the healthcare industry. In 2014, it sent some employees an arbitration agreement as an e-mail attachment. The agreement stated that employees could pursue wage and hour claims only through individual arbitration and that they waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.” The agreement also stated that if the waiver was deemed unenforceable, employees would be limited to filing class, collective, and representative claims in court—in other words, employees could not arbitrate class claims. The e-mail said employees would accept the agreement by continuing to work for Epic.

Jacob Lewis was one of the employees who received the arbitration agreement, and he acknowledged receipt of the document. He and Epic later had a dispute over his exempt classification and ability to collect overtime. He sued Epic in federal court, and Epic asked the court to dismiss the lawsuit and compel him to participate in individual arbitration. Lewis argued that the arbitration agreement was unenforceable because it violated his right to engage in concerted activity under the NLRA. The district court agreed and denied Epic’s motion. The employer appealed.

Court Says Arbitration Agreement Violated NLRA

Section 7 of the NLRA gives employees the right to organize, join a union, bargain collectively through their representatives, and “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Section 8 of the Act deems it an unfair labor practice for an employer to interfere with employees’ Section 7 rights.

The 7th Circuit began its analysis by noting that some courts and the NLRB have held that agreements requiring employees to renounce or waive their NLRA rights are unenforceable. Further, courts and the NLRB have interpreted Section 7’s “engage in other concerted activities” language to protect employees’ right to participate in collective or class action proceedings before administrative and judicial tribunals.

The 7th Circuit concluded that Section 7 “should be read broadly to include resort to representative, joint, collective, or class legal remedies,” regardless of whether an employee is a union member. It noted that the NLRB has stated that Section 7 prevents employers from entering into agreements with employees that bar class and collective remedies. According to the court, the Board’s interpretation is entitled to deference.

The court rejected Epic’s argument that because Federal Rule of Civil Procedure 23, which allows class action lawsuits in federal court, didn’t exist when the NLRA was passed, the Act could not be read to protect an employee’s right to file suit under the rule. The court said that argument was inconsistent with the NLRA’s express language protecting employees’ right to engage in “other concerted activities.” Also, the court noted that Epic’s arbitration agreement applied to all collective and representative procedures and remedies, not only class actions under Rule 23. Further, the court concluded, “Congress was aware of class, representative, and collective legal proceedings when it enacted the NLRA. The plain language of Section 7 encompasses them, and there is no evidence that Congress intended them to be excluded.”

Next, the court concluded that Epic’s arbitration agreement violated Lewis’ Section 7 rights because it prevented him from engaging in the “concerted activity” of participating in collective, representative, or class proceedings. The 7th Circuit distinguished its ruling from the 9th Circuit’s decision that a similar arbitration agreement didn’t violate the NLRA because the contract provided the employee a right to opt out without penalty.

The 7th Circuit stated that the 9th Circuit’s decision was inconsistent with previous case law and the NLRB’s position. In previous cases, the Board and the 7th Circuit both held that provisions that violate the NLRA cannot be made legal simply by showing that the contract was entered into without coercion. Moreover, the court noted that Epic’s arbitration agreement was coercive and that it was a condition of continued employment. Thus, the court held that Epic’s arbitration agreement violated Sections 7 and 8.

FAA Doesn’t Conflict With or Trump NLRA

Epic argued that even if the arbitration agreement violated the NLRA, it was enforceable under the FAA, which states that federal policy favors arbitration. The company contended that the FAA overrides labor law doctrines when dealing with the enforcement of arbitration clauses. The 7th Circuit rejected that argument for several reasons.

First, the court noted that Epic’s arbitration agreement expressly provided that if the class action waiver were declared unenforceable, employees would be required to pursue class or collective remedies in court. Because the court declared the class action waiver unenforceable, Epic couldn’t compel employees to participate in individual arbitration.

Second, the court held that even if the class action waiver didn’t exist, the FAA doesn’t override the NLRA, rejecting Epic’s premise that the NLRA is inconsistent with the FAA. The court reasoned that the FAA contains a “savings clause” that states that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Because the NLRA prohibits the enforcement of arbitration agreements that strip an employee of his right to engage in concerted activity, such agreements are unlawful and unenforceable, even under the FAA’s savings clause.

Finally, the court rejected Epic’s argument that the arbitration agreement should be enforced because previous court decisions held that such agreements were valid under the Fair Labor Standards Act (FLSA) and the Age Discrimination in Employment Act (ADEA). The 7th Circuit explained, “While the FLSA and [the] ADEA allow class or collective actions, they do not guarantee collective process. . . . The NLRA does.”

Supreme Court Review Likely

The 7th Circuit acknowledged that other federal appellate courts, including the 5th Circuit, have expressly or implicitly stated that the NLRB’s interpretation of Section 7’s application to class and collective action waivers is inconsistent with the FAA’s policy of liberally enforcing arbitration agreements. In the 7th Circuit’s view, those decisions were incorrect because they made no attempt to harmonize the FAA and the NLRA and were based on an incorrect assumption that the NLRA is hostile to arbitration agreements.

The court noted that the NLRA “expressly allows unions and employers to arbitrate disputes with each other” and permits collective bargaining agreements that contain arbitration clauses. According to the 7th Circuit, the NLRA isn’t hostile to arbitration agreements; rather, it bars arbitration agreements that prohibit concerted activity. Thus, Epic’s arbitration provision likely would have been enforceable had it allowed for collective arbitration.

Regardless of whether the 7th Circuit’s logic is sound, there is now a split in the federal appellate courts on the issue of the enforceability of arbitration agreements that prohibit class or collective proceedings. Thus, the Supreme Court will likely weigh in eventually. Until then, the 7th Circuit’s decision is binding in Wisconsin. Lewis v. Epic Systems Corporation.

Bottom Line

Employers that use arbitration agreements should consider revising them so they are consistent with the Lewis decision. Under Lewis, arbitration agreements that prohibit employees from participating in any form of class, collective, or representative action are unenforceable.

However, the 7th Circuit indicated that arbitration agreements in employment contracts are enforceable if they permit collective actions in arbitration. Thus, consider whether you value the arbitration of collective or class claims enough to revise your agreements.

This article, slightly modified to note recent updates, was featured in the August 2016 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.