United States Supreme Court Rules that Employers May Demand Individualized Arbitration of Employment Disputes

By: J. Tyler Mayhew
May 25, 2018

In a major win for employers, the United States Supreme Court held in Epic Systems Corp. v. Lewis that contracts requiring one-on-one arbitration of employment disputes are valid under the Federal Arbitration Act (“FAA”) and must be enforced according to their terms.1 The Court’s decision allows employers to avoid high-stakes class and collective actions through individualized arbitration, significantly reducing the costs and risks of employment claims.

The FAA mandates that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The act’s saving clause allows courts to invalidate arbitration agreements only “upon such grounds as exist ... for the revocation of any contract,” such as fraud, duress, unconscionability, or illegality. In Epic Systems, each of the employees signed an arbitration agreement requiring individual arbitration of employment-related claims and forbidding class or collective arbitration. The employees argued that the class and collective arbitration waivers in their agreements violated the collective-bargaining provisions of the National Labor Relations Act (“NLRA”), and were therefore illegal and unenforceable under the FAA’s saving clause.

The Court rejected the employees’ arguments as fundamentally flawed. Even assuming the NLRA rendered class and collective arbitration waivers illegal, the employees’ illegality defense did not fit within the FAA’s saving clause because it was not applicable to “any” contract. The FAA prohibits defenses that single out arbitration for disfavor, either directly or by “interfering with fundamental attributes of arbitration,” and the Court has previously held that requiring class-wide arbitration interferes with a fundamental attribute of arbitration.2 Although illegality is a generally-applicable contract defense, the employees’ argument that their arbitration contracts were illegal “just because [they] require[d] bilateral arbitration” impermissibly disfavored arbitration, and therefore did not implicate the FAA’s saving clause The Court went on to reject the employees’ argument that the NLRA should be read to override the FAA, finding that the NLRA’s collective-bargaining provisions do not “speak[] to the procedures judges or arbitrators must apply in disputes that leave the workplace.”

The Court’s decision has the potential to significantly reduce employer risk in employment disputes. Employers should consider consulting with skilled legal counsel to take advantage of this important development in arbitration law.

1 Record No. 16-285 (May 21, 2018), consolidated with Ernst & Young, LLP et al. v. Morris, Record No. 16-300; and NLRB v. Murphy Oil USA, Inc. et al., No. 16-307.

2 See AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).