Make Sure Your Arbitration Agreements Contain Class Action Waivers

As I have written about before, employee arbitration agreements are crucial to keeping employment-based claims out of court, and have several benefits, not least of which is having your case decided by an experienced arbitrator (usually a retired judge), instead of by jury which tends to get the law wrong and issue high dollar awards against employers based on volatile facts.

During the U.S. Supreme Court’s most recent term, the Court held that employers can use arbitration agreements to prohibit their employees from suing them in class action lawsuits. This means that an employer can include a clause in its arbitration agreements which requires the employee to waive the right to bring any claims against the employer as part of a class action lawsuit.  This bars the employee who signs from filing or participating in a class action lawsuit, whether it is filed in the civil court system or in the arbitration forum. The employee’s only recourse will be to litigate his or her claims as an individual in arbitration, and not as part of a class of employees.  This is crucial since a large class action judgment against an employer could effectively put it out of business.

The Supreme Court’s decision does not necessarily change anything for California employers because California already permitted class action waivers in arbitration agreements. Nonetheless, it is worth repeating this rule now, as I’ve found many employers that use arbitration agreements have not updated their agreements in years, using agreements that do not contain class action waivers.

However, California does not permit waivers of employees’ rights to bring “representative actions” under the California Private Attorneys General Act, also referred to as “PAGA.”  A PAGA representative action is similar to a class action, but with some key differences (that are beyond the scope of this blog). If your arbitration agreement’s class action waiver also waives the right to bring PAGA representative actions, or, if it does not carve out an exception for such actions, your agreement may be invalid and unenforceable.

Employer Action Items:

• If you don’t currently have your employees sign an arbitration agreement, get one! But don’t attempt to draft these yourself. Engage knowledgeable employment law counsel.
• If you do use arbitration agreements, check to see when it was last updated. Does it contain a class action waiver?  If not, be sure to have a waiver added, but don’t waive PAGA claims or it may be invalid!
• You should generally have your arbitration agreements reviewed annually (at the same time you do your employee handbook updates) to ensure they are up to date with the current state of the law. An arbitration agreement that was valid when it was drafted several years ago may be unenforceable today.