By David S. Baffa, Noah A. Finkel, and Joseph S. Turner

Seyfarth Synopsis: Congress has once again proposed legislation that would seek to ban mandatory workplace arbitration of employment claims, despite a string of United States Supreme Court decisions upholding arbitration and class/collective action waivers as a lawful and appropriate mechanism to resolve workplace disputes. 

H.R. 7109, the Restoring Justice for Workers Act, was introduced by Representative Jerrold Nadler, D-N.Y., and Representative Bobby Scott, D-Va., with 58 Democratic co-sponsors.  Similar legislation is expected to be introduced in the Senate by Senator Patty Murray, D-Wash, with eight Democratic co-sponsors.  The proposed legislation would  overturn the U.S. Supreme Court’s decision in Epic Systems, and would amend the National Labor Relations Act to specifically prohibit class and collective action waivers under a new “Section 8(a)(6).”

As proposed, the new law would prohibit any pre-dispute agreement requiring arbitration of employment disputes.  The law also would prohibit post-dispute agreements to arbitrate, unless the agreement is obtained without coercion or condition of employment-related privilege or benefit.  Employees entering into voluntary post-dispute agreements also must be made aware of their rights under what would be a new section of the National Labor Relations Act.  That new section would make it an unfair labor practice to “enter into or attempt to enforce any [pre-dispute] agreement” that would bar or prohibit class or collective actions relating to employment, or to retaliate against any employee for refusing to promise not to pursue a class claim.

While there is no chance that this bill will move in the House of Representatives as currently comprised, it previews the legislation Democrats are likely to pursue if the House changes control next week.  A bill like this could even put a narrowly-controlled Republican Senate to the test, as the perceived unfairness of pre-dispute mandatory arbitration has been the target of considerable media attention, social media campaigns, and as recently as yesterday — large-scale employee activism.  As such, protecting mandatory arbitration of workplace disputes may be an issue on which even conservative legislators might waver.

Indeed, this is not Congress’ first attempt to ban workplace arbitration.  Before the Supreme Court’s decision in Epic Systems, and as part of the #metoo movement, Congress introduced in December 2017, bi-partisan legislation ostensibly aimed at preventing employers from enforcing arbitration agreements of sexual harassment claims.  That bill, “Ending Forced Arbitration of  Sexual Harassment Act,” was introduced by Senator Kristen Gillibrand, D-NY (and attracted some Republic support), but was penned in a way that would actually ban workplace arbitration in its entirety.  We figured it was an oversight at the time, as written in our blog, “Slow Down Congress: You Are About to Render the FAA Inapplicable to Employment Disputes (and Class Waivers), and You Probably Don’t Realize It.”  Clearly, this week’s Halloween bill was no accident.

Most legislative action against workplace arbitration has centered on the idea of prohibiting arbitration of sexual harassment claims, and by extension all other Title VII claims.  Among the earliest efforts begun in 2009, when — perhaps ironically — then-Senator Al Franken pursued the Arbitration Fairness Act, which sought to prohibit the mandatory arbitration of sexual harassment claims.  While that legislation was not successful, Senator Franken’s efforts led to provisions in the Department of Defense Appropriations Act of 2010, which to this day prohibits contractors to the U.S. DoD, with limited exceptions, from requiring arbitration of Title VII claims (including sexual harassment claims).  Under President Obama, the DoD prohibition was expanded by his Fair Pay and Safe Workplaces Executive Order on July 31, 2014, effective January 2016, to all federal contractors.  President Trump, however, rescinded this EO shortly after taking office in late 2016.

Several state legislatures have sought to ban mandatory arbitration of sexual harassment claims.  Washington, Maryland, and New York each passed laws that would prohibit mandatory arbitration of sexual harassment claims, but those laws are either explicitly or presumptively preempted by the Federal Arbitration Act.  See our Client Alert on the New York Ban.

Facing increasing headwinds against mandatory arbitration of sexual harassment claims, several large companies have proactively and publicly declared that they will exempt sexual harassment claims from existing mandatory arbitration programs.  Other companies also are considering more limited arbitration programs, such as mandatory arbitration and class waivers for wage-hour claims only.  But the Halloween bill and other attempts to ban workplace arbitration altogether are also becoming more common following Epic.  The California legislature passed a law that would have barred arbitration of any violation of the California Labor Code or the Fair Employment and Housing Act, but it was vetoed by Governor Brown on September 30, 2018.  Governor Brown’s term ends this year, and on November 6th Californians will pick a new Governor of California to take office on January 7, 2019.

Kentucky also recently joined the fray.  On September 27, 2018, the Kentucky Supreme Court, in Northern Kentucky Area Development District v. Snyder shot down a workplace arbitration agreement on the basis that a mandatory arbitration agreement for employment claims is prohibited by Kentucky law, and not preempted by the Federal Arbitration Act.   Kentucky’s law prohibits any employer from requiring as a condition of employment an employee to “waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit…”.  The Court ruled that the statute was not an anti-arbitration clause provision, but an anti-employment discrimination provision.  Of course, calling arbitration a diminution of rights are “fightin’ words” to the U.S. Supreme Court, so we remain on the lookout for a cert petition.

For now, employers are staying the course.  Many companies remain interested in implementing dispute resolution procedures and mandatory arbitration programs that would limit their exposure to class and collective actions.  Most employers report faster and more efficient resolution of workplace grievances and concerns, with more ability to direct money and time to the resolution of real complaints, rather than simply to line the pockets of class action plaintiffs’ lawyers.

For more information on this topic, please contact the authors, your Seyfarth Attorney, or any member of the Firm’s Labor & Employee Relations Team.

Authored by Emily Barker

This week, in Sakkab, et al v. Luxottica Retail North America, Inc., the Ninth Circuit ruled that an employee cannot waive the right to bring a representative action under the Private Attorneys General Act (“PAGA”) through an arbitration agreement or any other means. In so doing, it found the California Supreme Court’s “Iskanian Rule”—which essentially says that pre-dispute agreements to waive PAGA claims are unenforceable under California law—was not preempted by the Federal Arbitration Act (“FAA”).

The FAA generally preempts any law that creates a special rule disfavoring arbitration or conflicts with the FAA’s objectives. The Luxottica Court found that the Iskanian Rule was simply a ground for the revocation of any contract. “The rule bars any waiver of PAGA claims, regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement.” The Court also held that it did not conflict with the FAA’s  purposes and thus was not preempted.

What the Ninth Circuit’s blessing of the Iskanian Rule will ultimately mean for California employers is still open to debate. The decision appears contrary to the United States Supreme Court holding in AT&T Mobility LLC v. Concepcion. There, the High Court held that the FAA preempted a California rule banning class action waivers in arbitration agreements because a rule “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration,” namely its informality, and “creat[ed] a scheme inconsistent with the FAA.” Because the rule stood as an  obstacle to the accomplishment and execution of the full purposes and objectives of Congress, it was preempted.

The Luxottica court attempted to distinguish PAGA actions by noting that unlike class actions, PAGA actions are not relegated to any particular procedure for resolution by due process. Since parties may agree to more informal measures of resolution for PAGA claims, it is possible to structure an arbitration agreement to align with the aims of the FAA. But as pointed out by the dissent, this “reasoning overlooks the simple fact that, by preventing parties from limiting arbitration only to individual claims arising between two contracting parties, the Iskanian rule interferes with the parties’ freedom to craft arbitration in a way that preserves the informal procedures and simplicity of arbitration.”

The dissent likewise highlights that while PAGA actions do not require the procedural formality of a class action, there will still need to be some mechanism to determine the number of other employees affected by the labor code violations, the number of pay periods that each of the affected employees worked, etc. This would require multiple, individual fact determinations regarding employment status and discovery of a breadth not normally conceived of in arbitration. “All of these additional tasks and procedures necessarily make the process substantially slower, substantially more costly, and more likely to generate a procedural morass than non-representative, individual arbitration”—all of which are contrary to the FAA’s aims.

And there is yet another piece of the Luxottica decision, not highlighted by the dissent, which seems to rest on circular logic, contra Concecpcion. The Luxottica Amici argued that  the Iskanian Rule conflicts with the FAA’s purpose to overcome judicial hostility to arbitration because it prohibits arbitration of individual PAGA claims. The Luxottica court summarily rejected this argument claiming Iskanian expressed no preference as to whether individual PAGA claims are litigated or arbitrated. “[The Iskanian Rule] provides only that representative PAGA claims may not be waived outright … [it] does not prohibit the arbitration of any type of claim.”

But this determination begs the question—when could an employee ever bring an individual PAGA claim if he is never allowed to waive his right to bring the claim in a representative capacity? The Iskanian Rule as adopted by the Ninth Circuit then would seem to squarely prevent arbitration of individual PAGA claims and should therefore be preempted under Concepcion.

While California employers must wait and see if the most-oft reversed Circuit lives up to its reputation, they are not out of options entirely when it comes to structuring cost-saving arbitration agreements.

It should be noted that both the Iskanian and Luxottica decisions left open the possibility of claim bifurcation through arbitration agreements.  That is, a court can compel an employee’s non-PAGA claims to arbitration, leaving only PAGA claims in court if the agreement makes clear this is the parties’ intent. For this reason, employers may wish to continue to include representative action waivers in their arbitration agreements, stating explicitly that to the extent not enforceable, the provisions applicable to PAGA claims are severable, do not void the entire agreement, and that it is the parties’ intent in such cases that the PAGA claims alone remain in court.

While such a provision could at first blush appear to increase costs by subjecting the employer to suits in two fora, one other factor should be considered. Neither the Iskanian Rule nor the Luxottica holding precludes setting the procedural order of adjudication of a PAGA claim by agreement; it mandates only that such claims cannot be waived. Employers thus could conceivably include provisions in their agreements providing that non-PAGA claims subject to a class action waiver must be adjudicated in arbitration before adjudication of any PAGA claims. This would essentially stay any PAGA claims in court until the arbitration was completed.

Such provisions would seem to be in line with the purposes of PAGA and the Luxottica decision. PAGA claims can only be brought by an “aggrieved” employee, so allowing a determination of whether the employee is aggrieved through individual arbitration prior to subjecting the employer to a PAGA suit would seem to comport with the statute. Likewise, the Luxottica reasoning is heavily based in the theory that employers can structure their agreements to allow for a streamlined PAGA adjudication in keeping with the goals of the FAA.

In the end, every employer needs to weigh the pros and cons of continuing to address PAGA claims in arbitration agreements, and there is no one size fits all approach. Given the apparent conflict between the Luxottica/Iskanian rule and Supreme Court precedent, the possibility of relegating the PAGA claims alone to court and staying them pending individual arbitration, and the generally shortened statute of limitations period for PAGA claims, implementation of an arbitration agreement may yet offer substantial protections against class and representative actions.