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

By Bill Allen and Steven Kaplan

Relying on AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), the U.S. Court of Appeals for the Fourth Circuit held on April 1, 2013 that an arbitration provision in a franchise agreement prohibiting signatories from participating in class and collective actions is lawful in light of the clear federal directive in support of arbitration. In Muriithi v. Shuttle Express, Inc., the Fourth Circuit further found that: (1) an agreement that provides for a split in the cost of arbitration must be analyzed on a case-by case basis; and (2) a truncated statute of limitations contained outside of the arbitration clause should be reviewed by the arbitrator. The court’s decision overturned the District Court of Maryland’s March 2011 pre-Concepcion ruling that the arbitration agreement was “so permeated by substantively unconscionable provisions” that it was unenforceable. The plaintiff, a driver for a passenger shuttle service, had alleged that he and other putative class members were improperly classified as “franchisees” or “independent contractors,” and were therefore entitled to minimum wage and overtime pay under the FLSA.

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By Edward Berbarie and Henry Lederman

Last week, the U.S. District Court for the Eastern District of New York upheld a class action waiver in an employment arbitration agreement, sending the plaintiffs’ FLSA collective action claims to arbitration on an individualized basis. The plaintiffs, former sales representatives for United HealthCare, claimed that the class action waiver was unenforceable for several reasons. First, the plaintiffs claimed that participating in a collective action under the FLSA is a statutory right that cannot be waived. The court disagreed, finding that nothing in the FLSA or its legislative history establishes that the right to participate in a collective action is a non-waivable right. To the contrary, the court reasoned that because an employee is required to file a consent form in order to participate in a collective action under the FLSA, an employee certainly has the power to waive their participation in such an action. The plaintiffs next attempted to rely upon the Second Circuit’s opinion in In re American Express Merchants’ Litigation, 667 F.3d 204 (2d Cir. 2012), which found a class action waiver to be unenforceable because the practical effect of enforcing the waiver in that case would have precluded the plaintiffs from bringing their claims. The court also rejected this argument, noting that the Second Circuit made clear that class action waivers are not per se unenforceable, and finding that the plaintiffs in this case failed to show that arbitrating their FLSA claims on an individual basis would have been cost prohibitive. Lastly, the court rejected the plaintiffs’ argument, under the NLRB’s D.R. Horton decision, that class action waivers violate employees’ rights to engage in concerted activity. The court instead agreed with the Eighth Circuit’s recent decision in Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. Jan. 7, 2013), which rejected the NLRB’s rationale in D.R. Horton and held that class waivers are enforceable in relation to claims brought under the FLSA.

Photo credit: Logan Simmons

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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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