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Second Circuit Upholds FLSA Class Action Waiver

Connecticut employers should take note that the U.S. Court of Appeals for the Second Circuit on August 9, 2013, issued a ruling upholding a class-action waiver in an employment agreement. In the case in questions, Sunderland v. Ernst & Young, LLP, the employee was making a claim for unpaid overtime wages, asserting that the employer improperly classified her as "exempt" for purposes of the Fair Labor Standards Act. The district court denied the employer's effort to compel individual arbitration, which had been agreed to by the employee in her original hiring. While on appeal, the U.S. Supreme Court decided American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013). That decision compelled the Second Circuit to reverse the District Court's decision.

Ms. Sunderland was claiming a loss of only approximately $2,000. She asserted that forcing individual arbitration would be untenable, precluding her from effectively vindicating her claim, because it would cost $200,000 to prove her case, in attorneys' fees and expert witness expenses. Pursuant to the American Express decision, the Second Circuit found that there was no Congressional bar to individualized arbitration and that the fees for the arbitration proceeding (as opposed to attorney and expert fees) were not too high. Thus, the employer was entitled to have the matter heard individually. Even though the employer won this issue, it should take caution: if Ms. Sunderland wins at arbitration, she could win attorney fees per the fee-shifting provision of the FLSA. Other employees may file their own claims for arbitration, and rather than pay $200,000 in attorneys' fees once, the employer may wind up having to pay attorneys' fees for each employee. A six-figure case could morph into a seven-figure exposure; collective action, on the other hand, provides for an all-in-one resolution. Employers should consult with experienced counsel to determine the best approach.

The Second Circuit, in footnote 8, addressed an interesting legal question. In 2012, the NLRB issued a ruling In re: D.R. Horton, Inc., 357 NLRB. No. 144 (Jan. 3, 2012), in which the Labor Board effectively stated that class action waivers inherently violated an employee's right to engage in concerted action regarding the terms and conditions of employment, per Section 7 of the NLRA. The Second Circuit chose to ignore that decision, as it felt it was deciding a case pursuant to the Federal Arbitration Act, over which the NLRB has no authority, especially as the NLRA does not expressly countermand class waivers in arbitration.

Employers and employees are faced with complex issues involving federal and state employment rights, labor law, class actions, and alternative dispute resolution. Given the increasing complexity of the legal landscape, they should consult with experienced counsel .

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