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Arbitration Clauses and the FLSA, Part I (Collective Action Waivers)

Under the Fair Labor Standards Act, an employee can sue her employer for unpaid minimum wages or unpaid overtime compensation on behalf of herself “and other employees similarly situated.”  29 U.S.C. § 16(b).  The ability to proceed collectively — i.e., as part of a group of similarly situated jobholders — is a powerful weapon for employees.  Many employees have very small claims, and having to litigate on an individual basis may discourage them from suing.  But by aggregating their claims in a collective action, employees can bring immense pressure against an employer.  In its 2003 decision in De Asencio v. Tyson Foods, Inc., the Third Circuit observed, in a related context, that “aggregation [of claims] affects the dynamics for discovery, trial, negotiation and settlement, and can bring hydraulic pressure to bear on defendants. The more aggregation, the greater the effect on the litigation.”  Despite the language of Section 16(b), there may now be a way for employers to ensure that employee claims are litigated individually.  To get there, we’ll begin by examining a late July 2014 case on a matter of first impression, which examines things that employers cannot do to prevent a collective action.

In Killion v. KeHe Distributors, LLC, a number of sales representatives for a food distributor were discharged in a corporate restructuring.  The employees were offered a separation agreement that, among other terms, required them to promise “not to consent to become[ ] a member of any class or collective action in a case in which claims are asserted against the Company that are related in any way to [their] employment or the termination of [their] employment with the Company.”  Some of the employees who signed the agreement later sued the employer for unpaid overtime wages.  Those employees sought to certify a collective action under Section 16(b), and asked the district court to void the collective-action waivers in the severance agreements.  The district court refused.  It upheld the waivers, and required the employees who signed the waivers to proceed individually.

The Sixth Circuit reversed.  Initially, the Court noted that “[n]o court of appeals appears to have squarely addressed this issue outside of the arbitration context.”  With no binding prior precedent, the Court looked to its recent decision in Boaz v. FedEx Customer Information Services, Inc. for guidance.  In Boaz, an employee signed an employment agreement that, among other things, required her to bring any legal action against the employer within six months of the date of the alleged violation.  The FLSA affords employees a much longer period of time in which to sue an employer for unpaid overtime wages.  When the employee later filed a lawsuit for unpaid overtime wages after the six-month time period had elapsed, the employer moved for summary judgment, arguing the employee’s claims were untimely under the employment agreement.  The Sixth Circuit disagreed, holding that “[a]n employment agreement cannot be utilized to deprive employees of their statutory [FLSA] rights.”  The Sixth Circuit applied the Boaz reasoning to the Killion case, finding “little reason to think that the right to participate in a collective action should be treated any differently than the right to sue within the full time period afforded by the FLSA.”  The Court found that the contract clauses in Boaz and Killion presented the same unacceptable situation, i.e., an employer attempting to navigate around the FLSA’s requirements by having employees sign a contract that waives away the employees’ rights.  For these reasons, the Sixth Circuit held, in Killion, that the collective action waivers in the severance agreements were invalid and void.

This reasoning seems straightforward and insurmountable: An employer cannot end-run the FLSA’s requirements by having employees waive them in a contract.  But what if the waiver is in a contract that also requires arbitration of FLSA employment disputes? Then it’s a whole new ballgame.

We are aware, of course, that the considerations change when an arbitration clause is involved.  Boat explained that “an employee can waive his right to a judicial forum only if the alternative forum allow[s] for the effective vindication of [the employee’s] claim.”  Id. at 606 — 07 (alteration in original) (internal quotation marks omitted).  Arbitration, it noted, is such a forum. Id. at 606.  But this line of precedents is of only minimal relevance here because the plaintiffs’ collective-action waivers in this case contained no arbitration clause. And, in any event, none of our precedents permitting arbitration of FLSA claims has addressed employees’ collective-action rights.

Counsel for the Killion employees said as much when the issue was raised at the end of the oral argument before the Sixth Circuit: “That’s a situation where the courts are trying to balance two competing federal policies — the labor policy and the arbitration policy.  That’s not this case.  There is no federal arbitration policy at issue here.  All you have is the labor policy and a contract that was made up by the employer.”  The Court agreed, finding that “[b]ecause no arbitration agreement is present in the case before us, we find no countervailing federal policy that outweighs the policy articulated in the FLSA.”  The Court also acknowledged an “emerging consensus” in other federal circuits, upholding collective-action waivers contained in an arbitration agreement.  If the separation agreements in Killion v. KeHE Distributors had required the arbitration of disputes, it’s very possible that the Sixth Circuit would have upheld the collective action waivers, thereby forcing the employees to arbitrate their claims on an individual basis.

The Sixth Circuit’s ruling in Killion contains important lessons for employers.  Of course, each circuit court’s opinion has its own nuances, and the reasoning various courts use to reach their conclusions on this issue is sometimes in conflict.  Still, with careful guidance, the holdings of these cases offer opportunities for employers who wish to confine FLSA litigation to an individual employee’s claims.


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