Authored by Noah Finkel
Since the Supreme Court’s decision earlier this year in AT&T Mobility LLC v. Concepcion, nearly all federal courts that have been faced with the issue, have enforced collective action waivers of federal wage-hour claims in arbitration agreements, assuming that the agreement was not unconscionable under state law. But a troubling recent decision by a federal district court judge in the Southern District of New York distinguishes class action waivers of state wage-hour claims, which it found generally enforceable, from collective action waivers under the Fair Labor Standards Act, which this judge concluded are per se unenforceable.
If this ruling is adopted by other courts, it could allow employees complaining of alleged FLSA violations to proceed on a collective action basis and be permitted to issue notice to purportedly similarly-situated current and former employees, despite their agreement to bring wage-hour claims only in arbitration on an individual basis. Employers’ mandatory arbitration programs containing class and collective action waivers, would therefore lose much of their efficacy. Indeed, even if this ruling is allowed to stand in a single circuit – here, the Second – that circuit quickly would become a favored forum by plaintiffs’ counsel seeking to bring nationwide collective actions.
In Raniere v. Citigroup, Inc., mortgage loan officers filed a hybrid FLSA opt-in collective action and New York law opt-out Rule 23 class action claiming that they were misclassified as exempt from the FLSA’s overtime requirements and thus owed back overtime pay and liquidated damages. The employer moved to compel arbitration of the claims brought by the employees who had signed arbitration agreements that, among other things, provided that FLSA claims could only be brought in arbitration and, then, only on an individual basis.
Plaintiffs made two arguments that the collective action waiver was unenforceable. First, consistent with another recent decision out of the Southern District of New York, the plaintiffs argued that, relative to their potential recovery, the costs and fees attendant to bringing the claim on an individual, rather than collective, basis effectively barred them from bringing suit at all. Given the substantial back overtime pay and liquidated damages that plaintiffs sought, the court rejected this argument.
Second, Plaintiffs argued broadly that giving effect to the collective action waiver would mean that the FLSA would not serve its remedial and deterrent functions. Relying on authorities, including the Supreme Court’s decision in Gilmer v. Interstate/Johnson Lane Corp., several circuit courts have ruled that collective action waivers under the FLSA are enforceable, including the Third, Fourth, Fifth, Sixth, Seventh, and Ninth Circuits. But the Raniere court nevertheless held otherwise in its 81-page opinion. Rejecting those authorities, it reasoned that the right to proceed collectively is a substantive right that a party cannot waive. It further reasoned that waiver of the right to proceed collectively is different in kind from waivers of the right to proceed as a class under Rule 23 because, unlike other federal statutes such as Title VII or the ADA that are governed by Rule 23, “Congress created a unique form of collective actions for minimum-wage and overtime pay claims brought under the FLSA” that “balance the need to incentivize the bringing of often small claims by way of collectivization in order to ensure the statute’s function, while barring actions brought on behalf of employees who had no real involvement in, or real knowledge of, the lawsuit.” In the court’s view, the right to sue under the FLSA contains an “integral aspect” of “the ability of employees to pool resources in order to pursue a collective action.” Under that view, an FLSA collective action waiver is, therefore, invalid per se.
The result of the Raniere ruling is that an arbitration clause requiring employees to bring their state law wage-hour claims in arbitration on an individual basis will be enforceable, while (even in the same case where there are both FLSA and state claims) the same arbitration clause will not be enforceable as to FLSA collective actions. Employers would thus be in the difficult position of having to defend an opt-in collective action in federal court and deciding whether to compel arbitration of state wage-hour claims on an individual basis. No other court has adopted such a seemingly illogical result. Collective action waivers requiring FLSA claims to be arbitrated on an individual basis remain enforceable in every circuit that has considered this issue and under the precepts of Concepcion. Whether the Second Circuit or ultimately the Supreme Court permit Raniere to stand remains to be seen. In the meantime, employers should bear in mind that Concepcion did not necessarily end collective actions when an arbitration agreement contains a class and collective action waiver.