A 2018 US Supreme Court case (Epic Systems Corp. v. Lewis) gave the green light for employers to bar employees from bringing class action arbitration cases for claims like unpaid wages. In new-hire paperwork with many major companies, employees will see that conditions of getting the job include agreeing (1) to use arbitration instead of going to court over disputes, and (2) in arbitration, an employee must pursue a claim individually rather than as a group. The Supreme Court approved these agreements, saying they are allowed under the Federal Arbitration Act of 1925, and that they do not violate the National Labor Relations Act.
These agreements make it nearly impossible for an employee to enforce rights under wage and hour laws, like overtime pay rules and failure to pay the agreed-upon amount, because the cases are usually too small to warrant paying a lawyer an hourly fee to take them individually. They are so small that a lawyer cannot afford to take them on a contingent fee, for instance putting in many dozens of hours for a percentage of $100 in unpaid wages. Compare this to class arbitrations where a group of employees bands together to bring an arbitration claim that all of them have been shorted their overtime pay. Handled as a group, the economics allow hiring an attorney to bring the case. In addition to paying an attorney, in arbitration the parties must pay part of the fee for the private arbitrator or panel of three arbitrators. In individual wage disputes, the employee would have to pay the arbitrator more than the employee would recover, but when the cases are grouped together, the arbitrator’s fee is spread out among many claimants. By comparison, if a case is heard in court instead of arbitration, there is no fee to the judge to hear the case; tax dollars have already paid for the judge to be in court and hear cases.
This decision follows a 2011 Supreme Court case (AT&T Mobility v. Concepcion) approving arbitration agreements with class action waivers in consumer cases. As with employment cases, consumer cases often involve small dollar amounts. If consumers must bring those cases individually and must pay an arbitrator to hear the case, it is economically counterproductive to bring the claim.
In both of these cases, the Supreme Court said that the Federal Arbitration Act of 1925 allowed arbitration agreements to ban class action cases. The Supreme Court was not bothered by the imbalance of power and funding between companies insisting on arbitration and individual consumers or employees. Congress originally envisioned arbitration as a way for companies to agree to settle disputes between businesses by private arbitration rather than by going to court. The idea was that arbitration could be faster and less expensive, due to streamlined discovery rules, informal rules for presenting evidence, and shortened time limits. Arbitration is well-suited for multi-million dollar disputes between two powerful business giants that are equally well-funded. However, over the decades since 1925, companies have expanded arbitration from its commercial roots to include disputes with individual consumers and employees. Because it isn’t feasible for a consumer or employee to negotiate special contract terms with a big company, consumers and employees are stuck with the take-it-or-leave it arbitration contracts that come with everything from cell phones to jobs with national employers.
The Federal Arbitration Act does not permit states to protect their citizens by limiting arbitration in their jurisdictions.
There have been several bills introduced in Congress to place limits on the use of forced arbitration in consumer and employment cases, or to ban them altogether. However, none has been enacted thus far as of the writing of this article.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough, NC. She can be reached at 919-732-7300 or firstname.lastname@example.org.
This article was last updated in January 2020.