All too often it seems employers are entirely unaware of the steps they can take to proactively protect themselves from employment litigation. Instead, employers and their attorneys do not address potential issues until litigation has actually been threatened or filed, by which time preventative measures have likely become a moot point. Yet, the law is providing more and more innovative opportunities to strategically protect an employer in ways much cheaper than actual litigation. This protection can reduce an employer’s potential monetary exposure for labor and employment matters by either minimizing litigation or by placing an employer in a position of greater strength should litigation arise.

Written agreements signed by new hires is one of these innovative opportunities. Most employers are undoubtedly aware of the basic written agreements for new hires. For example, a written authorization to deduct from the employee’s final paycheck any debts owed to the company or the value of any company property not returned at termination. Another common example includes a basic non-disclosure agreement prohibiting the employee from disclosing the employer’s confidential information both during and after employment (including the all-important fee-shifting provision if an employer successfully pursues a claim against an offending employee). Some employers may also be aware of the more advanced examples such as continuing (as opposed to one-time) authorizations for background checks or a non-competition agreement. Finally, only a slim number of employers may be aware of one of the most advanced examples; namely, a statute-of-limitations waiver reducing the time to file a lawsuit under Ohio’s anti-discrimination law from six years to six months.

These examples just scratch the surface of how employers can use written agreements with new hires to protect themselves from litigation, unfair competition, and the a myriad of other issues that arise under federal, state, and local law. One new option that has now become increasingly available for employers is the class action waiver and arbitration agreement.

The current impetus for these types of agreements comes from the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011). There, the high court upheld an agreement between AT&T and a customer requiring claims by the customer to be arbitrated and requiring the customer to waive his or her right to a class action. The AT&T agreement also had a number of clever provisions strategically designed to reduce the cost and expense of any legal dispute. Specifically, (1) a requirement that the customer provide AT&T with 30 days to provide an offer of settlement before the customer could file for arbitration, (2) a requirement that AT&T need only pay arbitration costs for non-frivolous claims, (3) a provision stating that for claims of $10,000 or less, the customer may choose a form of expedited arbitration where the case could be heard via telephone or based upon written submissions only, and (4) a provision stating that either party could proceed in the very inexpensive and quick small claims court in lieu of arbitration.

Management-side labor and employment attorneys have built upon Concepcion’s approval of class action waiver and arbitration agreements. They have done so by incorporating the waiver and arbitration provisions into employment agreements with the specific purpose of avoiding class actions or collective actions (i.e., the Fair Labor Standards Act’s version of a class action) that can create substantial monetary risk for an employer. In particular, class action waivers and arbitration agreements can try to minimize that risk even where an employer admittedly erred under the law.

Take, for example, an employer who clearly failed to comply with the Worker Adjustment Retraining and Notification Act (WARN), which requires a covered employer to provide 60 days’ notice or 60 days’ pay to employees suffering what the law defines as a “plant closing” or a “mass layoff.” If one employee files suit alleging a violation of the WARN Act, the liability on back pay is 60 days’ worth (plus, of course, any penalties, costs, or attorneys’ fees available under WARN). However, if that employee files a class action, and there were 300 employees terminated and not provided notice or pay, then all of a sudden the employer is facing liability 300 times greater than on the individual claim. The other 299 employees may have never even thought to consult an attorney and may have never brought a lawsuit against the company, but because one employee did consult an attorney who filed a class action all 300 employees (assuming class certification by the court) are now all pursuing claims against the employer.

Jason Starling

On that point, another reason for filing class or collective actions is to convert an otherwise economically-unviable lawsuit into an economically viable one by aggregating numerous claims. This allows the plaintiffs’ bar to view the lawsuit as worthwhile to pursue. For example, if an employer is mistaken as to whether a group of 100 call-center employees is entitled to overtime, it is very unlikely that a plaintiffs’ attorney would take a single employee’s claim for $300.00 in the hope that the FLSA’s fee-shifting provision would eventually provide a payday worth the attorney’s time. If, on the other hand, a plaintiffs’ attorney can proceed as a collective action and have the 100 call-center employees opt in to the action for their $300.00, then the case would be worth $30,000 (plus, of course, any penalties or attorneys’ fees available under the FLSA). That is a more attractive proposition to the plaintiffs’ attorney and may be viewed as more worthwhile to file and pursue. Of course, think about a situation where the mistake was $3,000.00 per employee over a three-year period (the maximum statute of limitations for FLSA claims). Then, the potential base liability expands to $300,000.00, as opposed to $3,000.00 which would not be worth a plaintiffs’ attorneys’ time. Or, think about a situation where the FLSA error involves 1,000 employees company-wide. Then, the potential base liability expands to $3,000,000.00 as opposed to $3,000.00.

Class action waivers and arbitration agreements can legally and permissibly nullify these incentives for plaintiffs’ attorneys and, in doing so, protect the employer. On the first example above, a class action waiver and arbitration agreement would have required those employees who obtained an attorney to pursue their claims on an individual basis, and would have prevented the activist employees from recruiting the uninterested employees through a class action. Only if the uninterested employees could be persuaded to pursue their own case, would there be claims brought on their behalf. Therefore, if the uninterested employees do nothing, the employer has at least diminished its liability even though, in that example, the employer clearly violated the law.

On the second example above, a class action waiver and arbitration agreement would have made the FLSA claims less important to the plaintiffs’ bar because there would be less money at stake on an individual basis. Very few, if any, plaintiffs’ attorneys would want to spend the time and effort arbitrating a $300.00 claim, or even a $3,000.00 claim. Again, the employer has once again diminished the potential liability it may face by shaping the practical incentives in its favor. Also, think about those clever provisions in the Concepcion arbitration agreement. For an FLSA case where the potential liability for a single employee is $300.00, the Concepcion agreement would have allowed the employer 30 days in which to settle by simply paying the $300.00 to the employee, further minimizing any incentive to arbitrate solely for speculative penalties or attorneys’ fees. Alternatively, the Concepcion agreement would have allowed for expedited arbitration that would drastically reduce attorneys’ fees for a $300.00 claim because arbitration is generally more informal than court litigation. This protects against a situation where a plaintiffs’ attorney deliberately runs up the bill hoping that the court will provide a good fee-shifting award that will eventually make the claim worthwhile. These are just some of the clever ways to shape the incentives and liabilities that make certain types of labor and employment litigation expensive.

Fortunately for employers, class action waivers in the labor and employment context have found increasing approval in the courts. In Killion v. KeHE Distributors, 885 F. Supp. 2d 874 (N.D. Ohio 2012), which was a recent federal district court case from the Northern District of Ohio, Judge Jack Zouhary found that a “collective action waiver is not offensive to the FLSA.” He upheld a collective action waiver for FLSA claims, relying in part upon the Concepcion decision by stating “that [the] policy [in Concepcion] applies in any context, including arbitrations that limit collective actions under the FLSA.” This case is quite helpful to an employer looking to use a class action waiver and arbitration agreement to remove an employee’s or plaintiffs’ attorneys’ incentives and benefits in bringing FLSA claims.

Other federal courts outside Ohio are increasingly reaching the same results. For example, in Parisi v. Goldman, Sachs & Co., No. 11-5229-cv, 2013 WL 1149751 (2nd Cir. Mar. 21, 2013), the Second Circuit found that the right to proceed in a class action under Title VII could be waived. This Second Circuit case is also notable because it can be read as implicitly overruling a district court case from New York that took the minority position by holding that the right to proceed in a collective action under the FLSA cannot be waived. See Raniere v. Citigroup, Inc., 827 F. Supp. 2d 294 (S.D.N.Y. 2011). This implicit overruling represents a positive development in the law for class action waivers and arbitration agreements in the employment context.

Even Ohio state courts have joined in citing the Concepcion decision with approval and upholding class action waivers and arbitration agreements. In Wallace v. Ganley Auto Group, 8th Dist. No. 95081, 2011-Ohio-2909, the Eighth District court of appeals held that a class action waiver and arbitration agreement were enforceable in the context of the Consumer Sales Practices Act (CSPA). The CSPA is a statute that, like all of the labor of employment laws, has a horde of case law citing and discussing the strong underlying public policy of protecting the vulnerable plaintiff. Thus, if Ohio courts are willing to uphold class action waivers and arbitration agreements for CSPA claims, then Ohio courts would also likely be willing to uphold such agreements for claims under Ohio’s anti-discrimination laws.

The point of this discussion is that there are new and innovative ways for an employer to protect itself through agreements with new hires, validated by new and emerging case law. However, employers that want to implement such agreements must use a labor and employment attorney who is skilled in drafting them. Arbitration agreements can be heavily scrutinized by the courts and, if they are too oppressive to the employee particularly where labor and employment laws are at issue, they will still be invalidated under general contract principles regardless of the Concepcion decision and the case law that follows it. An employer’s labor and employment attorney should know the nuances of the case law. Language and terms in the class action waivers and arbitration agreements are critically important.

Also, employers will want their labor and employment attorney to understand the nuances of the types of claims that should be subjected to a class action waiver and arbitration. For example, it may make sense to arbitrate only wage and hour claims, or only wage and hour claims under a certain amount individually. Wrongful termination claims may be inappropriate for arbitration because the appellate review of arbitration awards is nowhere near as meaningful as appellate review of court decisions or jury trials. Perhaps the employer will want the greater certainty of meaningful appellate review for wrongful termination claims where liability can be large depending on how much money the plaintiff-employee earned. Alternatively, perhaps the employer wants to use a class action waiver and arbitration agreements for low-paid employees (e.g., minimum-wage employees in industries such as retail) where potential liability is small because wages are low and the costs associated with litigating in court versus the lower costs of arbitrating justify moving claims by low-paid employees to arbitration notwithstanding lack of more meaningful appellate review. Finally, a potential downside of arbitration generally is that the relative ease of pursuing arbitration as opposed to a lawsuit may prompt employees to file claims for minimal slights that they otherwise might have ignored. However, either limiting the scope of claims subject to arbitration or using clever provisions such as those in Concepcion can work to minimize this particular downside. These are all the types of nuances that must be considered in analyzing how to effectively use a class action waiver and arbitration agreement to minimize an employer’s potential liability.