In late May 2018, the U.S. Supreme Court ruled in a trio of cases (Epic Systems v. Lewis, Ernst & Young v. Morris and National Labor Relations Board v. Murphy Oil) that arbitration agreements between employees and their employers, requiring individual arbitration, must be enforced. The court’s decision gives employers the green light to require applicants and employees to enter into arbitration agreements, waiving the ability to bring employment claims as class or collective actions or to bring employment claims in federal court.

Prior to the court’s ruling, employers included similar provisions in employment contracts but faced uncertainty in enforcement. The Supreme Court’s decision is a win for employers, who have increasingly been subjected to expensive, drawn-out class and collective claims in recent years.

Mandatory Arbitration Agreements

Mandatory arbitration agreements with class action waivers require that a single employee arbitrate his employment related claim against his employer rather than file a lawsuit in court or join a class action of employees with similar complaints. Attorneys for employees were far more willing to take on a class action than a single case as there was much greater potential financial recovery, including attorney’s fees.

This issue of whether mandatory arbitration agreements with class or collective action waivers are enforceable has become more hotly contested over the past five years. Groups of employees have filed lawsuits in cases involving all types of employment related claims, including under the Fair Labor Standards Act (FLSA), The Americans With Disabilities Act (ADA), The Family and Medical Leave Act (FMLA) and Title VII of the Civil Rights Act, despite the employees having entered into arbitration agreements waiving their ability to do so. Employers responded, seeking to compel arbitration.

Employees argued that the arbitration agreement waiving class or collective actions was not enforceable because it violated their right to engage in “concerted activities” under the National Labor Relations Act. The Supreme Court disagreed, deciding that arbitration agreements providing for individualized proceedings must be enforced and there is no conflict between the Federal Arbitration Act and the National Labor Relations Act.

Implications for the Construction Industry

A recent report from the Economic Policy Institute found that the construction industry is less likely than other industries to require mandatory arbitration agreements. While the Supreme Court’s recent decision is broadly applicable, there a few notable implications for the construction industry. First, the use of independent contractors is widespread in construction. To protect against a class action claim of independent contractor misclassification, employers should require a written independent contractor agreement that includes an arbitration provision with a class action waiver.

Second, contractors risk being deemed a “joint employer” of their subcontractor’s employees. The Fourth Circuit Court of Appeals decided in December 2017 that a contractor that was determined to be a joint employer was responsible under the FLSA for its subcontractor’s failure to pay its employees. While a contractor cannot bind its subcontractor’s employee to an agreement requiring individualized arbitration, it can contractually require its subcontractors to do so.

Contractors can also monitor their subcontractors' compliance with the FLSA and other laws.

Finally, keep in mind, federal law may prohibit contractors who contract with the United States from requiring employees to enter into mandatory pre-dispute arbitration agreements for certain types of claims (i.e. claims under Title VII of the Civil Rights Act or sexual harassment claims). These restrictions apply in contracts above a certain value and may not apply to arbitration agreements with employees that pre-date the federal law.

Deciding Whether to Enter into or Amend Employment Agreements

When deciding whether to enter into or amend employment agreements, employers have a lot to consider. There are several benefits to requiring arbitration and class waivers. Class and collective actions are extremely costly for employers; agreements to arbitrate outside of the class and collective action framework, and outside of the court system, allow the parties to settle disputes in a cost-effective manner. Arbitration is also typically confidential, which means that any resolution will not be publicly reported and will not create any binding precedent that could be used against an employer in a subsequent dispute. Without the risk of costly class litigation, an employer’s employment practice liability insurance premiums could be reduced.

However, some employers may decide not to enter into arbitration agreements with class waivers, preferring instead to resolve claims on a class or collective basis because it provides finality, and the employer does not have to worry about similar claims arising from similarly situated class member employees in the future. Employers should also note that an arbitration policy generally will not preclude the filing of administrative charges, and may not prevent the Department of Labor, the Equal Employment Opportunity Commission or similar agencies from bringing lawsuits, including class and collective actions on behalf of employees.

If an employer decides to require employees to enter into arbitration agreements, it is important to consider state law contract requirements to determine whether new agreements with existing employees can be based on continued employment only or require new consideration such as raises or bonuses. Employers must also decide whether to use standalone agreements or revise written employment agreements to include arbitration clauses.

Employers have flexibility to tailor the agreement and should talk through the options with an attorney. For example, employers should think about whether there are any types of employment disputes they want to carve out of agreements to arbitrate.