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Southern District of New York Judge Holds that Fair Labor Standard Act Collective Action Waivers in Arbitration Agreements Are Unenforceable As a Matter of Law

By Michael S. Arnold

Employers should take notice of a recent case out of the Southern District of New York, Raniere v. Citigroup, Inc., 11 Civ. 2448, 2011 WL 5881926 (S.D.N.Y. Nov. 22, 2011) (Sweet, J.), in which the court concluded that a Fair Labor Standards Act collective action waiver included in an arbitration agreement is unenforceable as a matter of law. (As discussed in a previous blog entry, collective actions are distinct from the more-commonly discussed class actions.)

In reaching its decision, the court noted that an arbitration agreement is unenforceable as a matter of law if it prevents an individual from vindicating an important statutory right.  After parsing through the FLSA’s legislative history, the court concluded that collective actions are a “unique animal” integral to the structure and functions of the FLSA, and therefore, denying a plaintiff the right to proceed collectively would have the practical effect of denying the plaintiff’s substantive rights.  Accordingly, the arbitration agreement at issue (which was actually an arbitration policy contained in the company’s employee handbook) was unenforceable because it contained a FLSA collective action waiver. 

The result in Raniere raises several points worth discussing:

First, just last month, we wrote about a New York State appellate court decision leaving open the possibility that JetBlue pilots could pursue collective arbitration despite the fact that their arbitration agreements were silent regarding the availability of that type of arbitration.  The takeaway from that post was that employers should ensure that their arbitration agreements explicitly required employees to waive their rights to proceed not only with class arbitration, but with collective arbitration as well.  But now, the Raniere case, if it remains good law going forward, effectively prevents employers from barring a collective arbitration of FLSA claims.  It is unclear, however, whether the Raniere court or another court would also refuse to enforce waivers of collective arbitrations under the Age Discrimination in Employment Act and Equal Pay Act, which both utilize the FLSA’s collective action mechanism. 

Second, the court did not determine whether the class arbitration waiver in the company’s arbitration policy was also unenforceable.    Instead, the court refused to order class arbitration because the arbitration policy required the parties to proceed with litigation if any part of the waiver was found unenforceable – a nice out for the court.  But what if the arbitration policy had included a severability clause and the class arbitration part of the waiver survived?  Assuming that such a waiver is enforceable (see AT&T Mobility LLC v. Concepcion) (endorsing the use of class action waivers in arbitration agreements)), how would a court (or arbitrator) respond when the individual attempts to proceed with hybrid collective-class action wage and hour claims?  In that situation, the right to proceed as a collective arbitration (under FLSA) is not waivable, while the right to proceed with class arbitration (under state law, such as the New York Labor Law) is waivable.  Will the court (or arbitrator) require the individual to arbitrate his or her state law wage and hour claim individually, while proceeding collectively with his or her FLSA claim?  Would the class arbitration waiver also be deemed unenforceable?  We suspect a court will resolve this issue in due course.  

Third, employers should rest assured that they may still enter into agreements requiring an employee to resolve FLSA claims through arbitration rather than litigation; they just cannot foreclose the employee from proceeding collectively to resolve the FLSA claims. 

Fourth, it remains to be seen whether other courts will reach the same conclusion as the Raniere court, or even whether this decision will survive any appeal (and we will update you as events unfold).  But for the moment, employers must continue to carefully craft their arbitration agreements to account for this decision. 

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Martha Zackin