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eLABORate: Second Circuit Rules Class Action Waivers in Arbitration Agreements can be Enforced in FLSA Suits

August 14, 2013

On August 9, 2013, the United States Second Circuit Court of Appeals held that an employee cannot invalidate a class action waiver provision in an arbitration agreement, even when the waiver removes the financial incentive for her to pursue a claim under the Fair Labor Standards Act. See Sutherland v. Ernst & Young LLP, 2013 WL 4033844 (2nd Cir. Aug. 9, 2013). The Sutherland Court’s holding was largely premised upon the supervening decision of the United States Supreme Court in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), which held that the Federal Arbitration Act does not permit the invalidation of class action waivers merely because a plaintiff’s costs in arbitrating a federal statutory claim would exceed the potential recovery. 

Stephanie Sutherland was briefly employed by Ernst & Young LLP from 2008-2009 and claimed that, during her employment, she regularly worked more than 40 hours per week without being paid overtime because she was misclassified by her employer as an exempt employee under the FLSA. In accepting her employment, Sutherland signed an arbitration agreement that specifically stated, in pertinent part, that “[c]laims based on federal statutes such as the Fair Labor Standards Act” were subject to the agreement’s arbitration provision, which required any disputes arising between Sutherland and her employer to first be submitted to mediation and, ultimately, binding arbitration if necessary. The arbitration agreement also barred “any class or collective proceedings in the arbitration.” Though Sutherland conceded that, if enforceable, these provisions would likewise bar the filing of her putative class action lawsuit, she argued that the class action waiver she executed was unenforceable because proceeding individually in arbitration would be prohibitively expensive.  In other words, because Sutherland was only seeking to recover $1,867.02 in unpaid overtime wages, she claimed she would be impermissibly required to spend approximately $200,000 to recover less than $2,000 in order to effectively vindicate her claims in an individual arbitration. 

The Second Circuit rejected Sutherland’s reasoning in light of the Supreme Court’s American Express Co. decision and concluded that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” Accordingly, the court concluded the “effective vindication” doctrine cannot be used to invalidate class action waiver provisions in circumstances where the recovery sought is exceeded by the expenses of individual arbitration. 

The Second Circuit’s rejection of Sutherland’s “effective vindication” argument is a critical extension of the Supreme Court’s American Express Co. decision into the FLSA arena, where FLSA collective actions continue to be filed at a record pace, and emphasizes the importance of employers evaluating whether they should consider arbitration agreements for their employees, and inclusion of class and collective action waivers in those agreements. Employers in other circuits should stay tuned to see if more circuits follow the Second Circuit’s lead.