Employers May Not Prohibit Class Actions, Holds The 7th Circuit

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The 7th Circuit Court of Appeals recently created a schism between the Circuits that may lead to the Supreme Court’s intervention on an important issue: whether an employer may bar employees from bringing class action claims by requiring claims to be arbitrated. The 7th Circuit, in deciding that employers cannot do so, has diverged from the 5th Circuit, leaving a circuit split that the Supreme Court will now likely be compelled to resolve.

In Lewis v. Epic Systems Corporation, Case No.15-2997 (2016), the Court considered a clause in an agreement requiring wage-and-hour claims to be brought only through individual arbitration. The employer further had employees agree to waive the right to seek class or collective claims. When a dispute about overtime pay arose between Lewis and his employer, Lewis filed suit in Federal court, alleging a violation of the Fair Labor Standards Act (FLSA) and Wisconsin Law. The employer moved to compel arbitration, and the District Court denied the motion. The employer appealed.

The 7th Circuit affirmed the District Court’s decision. The Court held that the arbitration provision violated Section 7 rights under FLSA, which states that employees have a right to “self-organization” and to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Since “concerted activities” have long been deemed to include “administrative and judicial forums,” and collective or class proceedings “fit well within the ordinary meaning” of the phrase, the Court deemed that the employer’s requirement that employees waive the ability to file class actions was thus unenforceable The court also diverged from the 5th Circuit by holding that the right to proceed collectively in arbitration was a procedural right – the 7th Circuit considered it a substantive right that an employer cannot compel an employee to waive. Finally, the court also determined that the Federal Arbitration Act, despite its promotion of arbitration, also allowed for the unenforceability of arbitration agreements “…upon such grounds as exist in law or equity for the revocation of any contract.”

The 7th Circuit has thus gone against the prevailing winds in the increasing use of arbitration. A recent series in the New York Times has brought attention to the increasing use of arbitration and its effect on claims against corporations and employers. It is unlikely that this added scrutiny had any effect on the 7th Circuit’s decision – after all, a case is pending for months, if not years, by the time it makes it to the 7th Circuit. However, the added scrutiny will almost certainly keep this case in the headlines if – perhaps, when – the issue comes before the Supreme Court.


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