Enforceability of class action waivers under review

Many employers are wary of class action lawsuits, and for good reason. Wage and hour class action lawsuits can result in significant financial loss and can threaten the health of a business.

In order to limit liability, many employers include a class action waiver provision in employment contracts, or have an employee sign a waiver of class action rights. These waivers have had some success in limiting the ability of employees to engage in class action lawsuits, instead requiring arbitration to deal with employment claims, including wage and hour claims under the Fair Labor Standards Act and National Labor Relations Act.

This may no longer be an effective method to limit liability. In fact, depending on an upcoming Supreme Court decision, it could ultimately render invalid an entire employment contract or portions of a contract, leaving the employer more vulnerable than if it had never been included.

Recent decisions on waivers should give employers pause

A recent case heard before the National Labor Relations Board held that a waiver of class action rights, which employees signed on their first day of employment, violated Section 8(a)(1) of the National Labor Relations Act. While the employer argued that the waiver was optional, and not mandatory, the judge failed to find this argument convincing. The NLRB did not decide on the enforceability of the employment contract as a whole.

Just days prior to this decision, the 9th Circuit Court of Appeals held that a waiver of class action rights was also unenforceable. However, it did not reach this conclusion by finding that including such a provision was unconscionable. This is important, as finding such could have rendered the entire employment contract unenforceable.

U.S. Supreme Court to weigh in

This year, the Supreme Court will hear three consolidated cases regarding the enforceability of class action waivers in employment agreements. Its ruling may have wide-ranging effects on the enforceability of such provisions. Depending on what the court holds, employers may find that an otherwise standard employment contract could come under court scrutiny.

At the very least, employers should take away that class action waivers in employment agreements will be highly scrutinized. Those seeking to limit liability should consult with an experienced employment law firm to discuss the best options currently available for doing so.