The U.S. Court of Appeals for the Second Circuit recently handed employers another victory in the fight over enforcement of class action waivers. The court ruled that the Fair Labor Standards Act (FLSA) does not bar enforcement of a class action waiver provision in an arbitration agreement with an employee, even if that waiver removes the financial incentive for the individual employee to pursue the claim. In doing so, the Second Circuit joined the Fourth, Fifth, and Eight Circuits allowing waiver of FLSA collective action claims.

In Sutherland v. Ernst & Young LLP, issued on August 9, 2013, the Second Circuit reversed a district court’s denial of the defendant’s motion to compel arbitration. The district court based its decision on the Second Circuit’s 2009 decision in In re American Express Merchants’ Litigation (Amex I). In Amex I, the Second Circuit invalidated an arbitration agreement’s class action waiver because the plaintiffs would incur prohibitive costs if compelled to arbitrate individually, and enforcement of the agreement would deprive them of substantive rights under federal antitrust statutes.

The U.S. Supreme Court’s decision this year in American Express Co. v. Italian Colors Restaurant reversed Amex I. The Supreme Court held that a plaintiff could not invalidate a waiver of class arbitration under the “effective vindication doctrine” by showing that he or she had no financial motivation to pursue claims in individual arbitration. 

In Sutherland, the plaintiff filed a putative class action for unpaid overtime wages, despite an arbitration agreement barring class or collective action arbitration. In response to the defendant’s motion to compel arbitration, the plaintiff argued that requiring individual arbitration would impermissibly prevent her from “effectively vindicating” her rights under the FLSA and the analogous New York state law. The plaintiff claimed that her potential recovery of less than $2,000 was far exceeded by the costs of pursuing the claim individually, which she estimated at approximately $200,000.

On appeal, the Second Circuit noted the Supreme Court's admonition in Italian Colors that “reminded lower courts to ‘rigorously enforce arbitration agreements according to their terms, including terms that specify with whom [the parties] choose to arbitrate their dispute, and the rules under which the arbitration will be conducted.’”

Looking to the enforceability of the agreement, the Second Circuit first considered whether the FLSA contains a “contrary congressional command” barring waiver of class arbitration. Noting that every Court of Appeals to consider the issue has concluded that the FLSA contains no such language, the Second Circuit concluded that the waiver of collective action claims is permissible under the FLSA.

The Second Circuit then rejected plaintiff’s argument that she cannot “effectively vindicate” her rights in an individual arbitration because there is no financial incentive to do so. The court reasoned that Italian Colors “compels the conclusion that Sutherland’s class-action waiver is not rendered invalid by virtue of the fact that her claim is not economically worth pursuing individually” because, according to the Supreme Court, “‘the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.’”

Sutherland joins the growing body of cases upholding the use of class action waivers for a variety of employment claims.

Ballard Spahr’s Labor and Employment Group routinely assists employers with FLSA compliance and in drafting and reviewing employment and arbitration agreements. If you have questions or concerns about any workplace policies, please contact Shannon D. Farmer at 215.864.8221 or farmers@ballardspahr.com, Andrew I. Herman at 215.864.8412 or hermana@ballardspahr.com, or the member of the Group with whom you work. 


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