Wage & Hour Counsel : Wage & Hour Lawyer & Attorney : Littler Mendelson Law Firm : Employment Law, Labor Relations

By Steven Kaplan

While arbitration agreements are generally enforceable in the Fourth Circuit, a Maryland court recently denied a motion to compel arbitration in a collective action based on three provisions the court believed were “unconscionable. In Gadson v. Supershuttle International employees filed a collective action under the FLSA alleging that the employer misclassified them as independent contractors. In response, the employer filed a motion to compel arbitration because the plaintiffs had executed franchisee agreements that contained a provision to arbitrate disputes arising from the agreement. Plaintiffs opposed the motion asserting that the following three provisions were unenforceable: (1) fee splitting; (2) prohibition of class actions; and (3) truncating the statute of limitations. The court agreed and held that the “severability” clause could not save the agreement because it would require “a near rewrite of the contract.”

The court found the fee splitting provision unlawful because the individual recovery for each plaintiff was projected to be far below the cost of the arbitration. To support this argument, Plaintiffs provided the court with their tax returns which demonstrated that they would not be able to afford the arbitration.

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A recent decision by the U.S. District Court for the Southern District of New York illustrates the impact of class waiver provisions in employment agreements. In Sutherland v. Ernst & Young LLP, plaintiff, a former accountant, brought a class action against Ernst and Young (“E&Y”) under the Fair Labor Standards Act and New York law, alleging that she and putative class members were unlawfully denied overtime compensation. E&Y moved to dismiss and compel arbitration of Sutherland’s claims on an individual basis pursuant to the parties’ arbitration agreement which included a class waiver provision.

In denying defendant’s motion, the court relied on In re American Express Merchants’ Litigation, 554 F.3d 300 (2nd Cir. 2009) (“Amex”). There, the Second Circuit invalidated a class waiver provision in an arbitration agreement, finding that it precluded plaintiffs from vindicating their statutory rights. The Amex court held that the enforceability of a class waiver provision should be determined by referencing several factors, including: (1) the provision’s fairness; (2) the individual plaintiff’s cost-to-recovery ratio; (3) the ability to recover attorneys’ fees and costs and thus obtain legal representation; and (4) the waiver’s effect on the company’s “ability to engage in unchecked market behavior.”

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