United States: Second Circuit Holds Class Action Waivers Enforceable Against FLSA Claims

An employee may be compelled to arbitrate claims under the Fair Labor Standards Act (FLSA) on an individual basis, the U.S. Court of Appeals for the Second Circuit concluded on Friday. In Sutherland v. Ernst & Young LLP, the Second Circuit reversed the decision of the U.S. District Court for the Southern District of New York denying Ernst & Young's motion to compel arbitration against a former employee. The court held that: 1) the FLSA does not include a contrary congressional command that prevents a class action waiver provision in an arbitration agreement from being enforced according to its terms; and 2) the U.S. Supreme Court's recent decision in American Express Co. v. Italian Colors Restaurant (Italian Colors) precludes the application of the judge-made "effective vindication doctrine" to invalidate an arbitration agreement where a plaintiff argues that proceeding individually in arbitration on an FLSA claim would be "prohibitively expensive."

The plaintiff's offer of employment, which she signed, stated that covered employment disputes would be subject to mandatory arbitration according to the company's alternative dispute resolution program, the Common Ground Dispute Resolution Program ("Common Ground"). Moreover, she signed a confidentiality agreement, agreeing to resolve covered disputes according to Common Ground. The offer letter and confidentiality agreement included a copy of Common Ground, which barred both civil lawsuits and any class or collective proceedings in arbitration. Yet, she filed a civil putative class action against Ernst & Young alleging violation of the FLSA and New York State law regulating the payment of overtime compensation. Ernst & Young moved to dismiss or stay the proceedings and compel her putative class action to arbitration.

The Southern District of New York denied Ernst & Young's motion under the Second Circuit's 2009 decision in In re American Express Merchants' Litigation (Amex I), a decision which invalidated a provision barring class actions in the antitrust context where the plaintiffs demonstrated that they would be unable to vindicate their statutory rights if that provision was enforced. The Southern District of New York reasoned that enforcement of the class waiver provision would "effectively ban" all proceedings by the plaintiff against Ernest & Young because of the nature of her "low-value, high cost claim."

The Second Circuit reversed the lower court, noting that the Amex I opinion upon which the Southern District of New York relied in denying Ernst & Young's motion was overruled by the U.S. Supreme Court's Italian Colors decision. Italian Colors held that plaintiffs could not invalidate a waiver of class arbitration under the so-called "effective vindication doctrine" by showing that "they ha[d] no economic incentive to pursue their antitrust claims individually in arbitration."

Here too, the Second Circuit held, despite the fact that the plaintiff had put forth evidence that she would have to spend approximately $200,000 in costs and fees to prosecute her FLSA claims on an individual basis for a potential recovery of less than $2,000, she could not invalidate the class action waiver provision in Ernst & Young's Dispute Resolution Agreement by showing that it was not economically worth her pursuing her FLSA claims against the company individually. Quoting Italian Colors, the Second Circuit reasoned that the "effective vindication doctrine" was inapplicable because "the fact it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy."

The Second Circuit further held that the FLSA contains no contrary congressional command which required the rejection of Ernst & Young's class action waiver provision. The text of the FLSA, the court concluded, does not evince an intention to preclude a waiver of the class action procedure, despite the fact that the FLSA allows for the possibility of the collective action procedure. Further, U.S. Supreme Court precedent, including AT&T v. Concepcion and Gilmer v. Interstate/Johnson Lane Corp., "inexorably" lead to the conclusion that the waiver of collective claims is permissible in the FLSA context.

Notably, the Second Circuit also refused to follow D.R. Horton, Inc., a case in which the National Labor Relations Board (NLRB) held that a waiver of the right to pursue a FLSA claim collectively either in arbitration or in a civil action violates the National Labor Relations Act (NLRA). Like the Eighth Circuit before it, the Second Circuit determined it owed no deference to the D.R. Horton opinion because the opinion trenched upon a federal statute and policy unrelated to the NLRA (i.e., the Federal Arbitration Act). The court further noted that the NLRB may have decided the D.R. Horton opinion without a proper quorum.

In holding that class action waivers are enforceable against FLSA claims, the Second Circuit's Sutherland opinion gives employers another tool to enforce arbitration agreements with class action waivers in the employment context.

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