United States: Adding Customer Value With Arbitration Agreements

Last Updated: July 9 2019
Article by Gerald L. Maatman Jr.

In this scenario, a staffing company owner is concerned about the class action lawsuit brought against her client. What can she do to protect her own business as well as her clients' businesses?

RightChoice Staffing, based in Duluth, MN, provides temporary workers to various companies in the textile industry across the upper Midwest. The company is growing and, because owner Deanna Davies knows her business could be devastated by even one class action lawsuit, she follows her lawyers' advice of always requiring temporary employees to sign an arbitration agreement with a class action waiver.

Davies is informed that a temporary employee has filed a class action lawsuit against the staffing company and its client, Jada Designs, for alleged wage and hour violations. Davies is not concerned for her company due to her compliance activities and the fact that she has instituted measures such that courts will compel the plaintiff to arbitration, but she immediately thinks about the consequences for Jada Designs (which is a small company and longtime client). Could this class action put Jada Designs out of business, which then of course would have an effect on her own business? How can she keep that from happening now and in the future?

Using Arbitration Agreements

Davies turns to the American Staffing Association, of which her company has been a member for several years, for advice. She finds a recently published article, "Using Arbitration Agreements as a Value Add for Customers," that helps ease her concerns.

Davies learns that employers are turning to workplace arbitration agreements with increasing frequency to mitigate litigation risks and deliver benefits to employees in the form of expeditious and cost-effective resolution of workplace disputes. The U.S. Supreme Court's ruling this past year in Epic Systems Corp. v. Lewis strengthens the risk mitigation features of arbitration agreements by upholding the legality of an arbitration agreement containing a waiver of the ability to file or participate in class actions. As a result, appropriately drafted and implemented arbitration agreements with class action waivers can reduce an employer's susceptibility to class action litigation.

Many staffing companies have implemented arbitration programs with class action waivers for their temporary workers. Even if a worker (or his or her lawyer) declines to abide by the arbitration agreement and instead files a judicial action (including a class action), employers can block the lawsuit by filing a motion to compel arbitration under the Federal Arbitration Act. By and large, courts have upheld such agreements in the wake of Epic Systems, and granted motions to compel arbitration on an individual, bilateral basis. In sum, class actions are blocked. This reassures Davies that her company is indeed safe from the class action currently at hand, but what about her client?

Avoiding Class Action

An often-overlooked attribute of workplace arbitration agreements is the potential for third parties to invoke them to avoid a class action. As the Epic Systems ruling is applied by courts and employers acquire more sophistication relative to crafting arbitration clauses, a growing body of case law is allowing customers of staffing companies to rely upon the arbitration agreements signed by temporary employees to "piggy back" on staffing companies' motions to compel arbitration. Various legal theories are invoked in this context, including the notion that the customer is a third-party beneficiary of the agreement and/or the worker is equitably estopped to arbitrate any of his or her claims.

Recently, a federal appellate court—the Third Circuit in Philadelphia, one of 12 federal circuits that is one notch below the U.S. Supreme Court—endorsed this approach in the case of Noye et al. v. Kelly Services et al. The plaintiff had signed an arbitration agreement with Kelly Services that contained a class action waiver. Nonetheless, he brought a nationwide class action for alleged violations of the Fair Credit Reporting Act relative to his onboarding. The district court granted Kelly's motion to compel the plaintiff to adjudicate his claim in an individual, bilateral (i.e., nonclass action) basis. It denied a tagalong motion by Kelly's customer. On appeal, the Third Circuit reversed the ruling with respect to the customer and remanded on the basis of the equitable estoppel theory.

As the ruling in Noye reflects, staffing companies can provide a value add to their customers if their arbitration agreements are drafted with care and allow for application to others based on a third-party beneficiary and/or equitable estoppel theory.

Davies will review this information with her legal counsel to determine whether her arbitration agreement could help protect Jada Designs against the wage and hour class action.

Originally published by Staffing Success.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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