Your work is just another business transaction

OCTOBER 2017 TERM

The U.S. Supreme Court decision in Epic Systems Corp. v. Lewis, 2018 DJDAR 4705 (May 21, 2018) is a nasty blow to the nation's workforce, which relies on the class action mechanism to enforce and protect their legal rights. The court held that arbitration agreements which waive workers' rights to seek redress through class action are enforceable. The 5-4 decision addressed two federal statutes in conflict, the Federal Arbitration Act and the National Labor Relations Act, and ultimately adopted technical legal reasoning favoring the FAA mandate on judicial enforcement of arbitration agreements over the NLRA's protection of workers' rights to engage in concerted activity for their mutual aid and protection.

Justice Neil Gorsuch concedes at the outset of the majority decision that, "As a matter of policy these questions are surely debatable. But as a matter of law the answer is clear." It is that avowed reliance on technical legality over public policy which underscores the ultimate flaw of the decision -- it wholly fails to account for the "human" element unique to employment.

In a scathing dissent, Justice Ruth Bader Ginsburg, joined by the three liberal-leaning justices -- Stephen Breyer, Elena Kagan and Sonia Sotomayor -- focused on public policy and the damage this decision will cause the nation's employees, stating "The Court today subordinates employee-protective labor legislation to the Arbitration Act. In so doing, the Court forgets the labor market imbalance that gave rise to the ... NLRA, and ignores the destructive consequences of diminishing the right of employees 'to band together in confronting an employer.'"

The dissent recognizes that the NLRA is a profoundly human statute, acknowledging that employer and employee bargaining power are inherently uneven, but employees' strength in numbers can help level that playing field. The FAA on the other hand is a procedural statute rooted in the cold efficiency of enforcing the terms of a contract to arbitrate without regard for "human" factors. The FAA makes no distinction between the human relationship of employment and perfunctory business transactions.

AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), foreshadowed this decision seven years ago by acknowledging that, although the public policy benefits of class action litigation are substantial, the FAA still requires the enforcement of class action waivers in otherwise valid arbitration agreements. But while Concepcion may have provided a legal foundation for Epic Systems, the human stories behind the cases have nothing in common. Concepcion involved a consumer who was overcharged $30 for a phone. Thirty dollars for a phone is not about paying a mortgage or putting food on the table. No one's overall satisfaction in life has been tied to saving a few bucks on a phone. No one spent years training, racked up student loans, built a resume, moved their family to a new city, or sacrificed their personal time to fight over $30 owed on a phone. By affording the same legal treatment to the employment relationship as the purchase of a phone, the Supreme Court majority confirmed what millions of workers have already felt: Your work is just another business transaction.

The class action mechanism can prevent workplace injustice before injustice has even occurred. Much has been written about the deterrent effects of class actions, and until now, employers with any substantial workforce routinely spent significant resources developing and vetting their employment policies to ensure legal compliance and mitigate the risk of getting hit with a class action. In effect, risk-averse employers were forced to self-police and make conservative decisions on labor practices lest they walk into a class action minefield.

Now with Epic Systems largely disarming that minefield, such self-policing is no longer incentivized. Conversely, when the success of a business comes down to how costs and margins are managed, employers with arbitration agreements in place are incentivized to take more risks with labor costs. Like other calculated risks businesses take with legal compliance (taxation, for example) if you eviscerate the risk of being wrong, the incentive to do right is eviscerated as well. This creates a sort of moral hazard where employers can take more chances and cut more corners on compliance with labor laws knowing that at the end of the day their risk is limited. Meanwhile their employees absorb the corresponding costs by working under illegal conditions without the ability to leverage change. Such employee costs are not just monetary -- they include time, opportunity, health and well-being.

Class actions also give a voice to aggrieved workers that they may not otherwise have. Most class litigation in employment falls into one of two categories: (1) policies or practices that violate specific sections of the Labor Code, or other statutes governing terms and conditions of the employment relationship -- unpaid wages, overtime, meal and rest breaks, off the clock work, payroll policies, etc.; and (2) those that result in disparate impact on certain protected classes of employee -- including pay gaps based on gender and other protected characteristics.

As to the first category, the class action mechanism is superior for the very same reasons as in other non-employment actions, where a single offense may produce small fines or damages, but becomes substantial and worth fighting for when aggregated. Moreover, employees have to consider the very real possibility that their employer could retaliate in a way that affects their livelihood. The class action mechanism counteracts that threat of retaliation by affording aggrieved employees the ability to recover in relative anonymity as part of a class, or by allowing a former employee to act for the benefit of those still working for the employer. Without class litigation, each employee has the individual burden of deciding whether to stick their neck out to stop repeat violations or just continue to put up with it because the risk of standing up is not worth the reward. Employers no doubt will adjust their practices post-Epic Systems -- again, deriving value in the margins -- knowing many employees will choose the latter.

As to second "disparate impact" line category of class action, Epic Systems is a virtual death sentence. It has long been acknowledged by courts that these cases are particularly well-suited for class litigation. As Justice Potter Stewart wrote four decades ago in E. Texas Motor Freight Sys. Inc. v. Rodriguez, "We are not unaware that suits alleging racial or ethnic discrimination are often by their very nature class suits, involving class-wide wrongs. Common questions of law or fact are typically present." 431 U.S. 395, 405 (1977).

But it is not just that disparate impact cases are well-suited to class litigation, it is also that they are often nearly impossible to litigate on a single-plaintiff basis because of the resources needed to effectively prosecute them. Cases involving "pay gaps," for example, require extensive data mining, discovery across large groups of employees, and hiring experts to conduct complex statistical analysis, all at significant expense. Although the arbitration process may ostensibly provide for suitable discovery procedures, in practice, discovery always involves a certain balance between cost and expected outcome, and these types of analyses will often be cost-prohibitive on an individualized basis. The result is that the offending employer again reaps the benefit of discriminatory policies while its employees absorb the costs.

So where do we go from here? It is likely the next move will be legislative, as urged by the dissent which states, "Congressional correction of the Court's elevation of the FAA over workers' rights to act in concert is urgently in order." But change is unlikely to occur at the congressional level with its current political makeup.

At the state level, California lawmakers introduced Assembly Bill 3080 in February, which seeks to restrict employers from requiring employees to enter into any sort of agreement that would waive their right to bring a Fair Employment and Housing Act or Labor Code claim in court. Two major problems exist, though: (1) it would only affect contracts signed after Jan. 1, 2019, while in the interim any employer who has not already bound its workforce to arbitration agreements with class waivers will have had ample time to do so; and (2) while its drafters did an admirable job of making it facially neutral as to arbitration itself, the overall aim is obvious and Epic Systems does not inspire confidence it could survive a preemption/dormant commerce clause challenge. Therefore, it seems likely Epic Systems will remain good law unless there is a power change at the federal level, and Congress takes action to change the Federal Arbitration Act to restore employees' rights to collectively address workplace wrongs.