Federal Circuit Split Over Class Action Waivers in Employment Arbitration
In 2016, federal appellate courts reached conflicting conclusions about whether employers may require employees to waive their right to participate in class or collective actions as a condition of employment. The Seventh Circuit’s decision in Lewis v. Epic Systems Corp. (May 26, 2016) directly conflicted with earlier Fifth Circuit precedent—setting the stage for eventual U.S. Supreme Court review.
The Seventh Circuit’s Decision in Epic Systems
On May 26, 2016, a unanimous panel of the U.S. Court of Appeals for the Seventh Circuit held that an employer’s arbitration agreement requiring employees to waive their rights to participate in “any class, collective, or representative proceeding” violated Section 7 of the National Labor Relations Act (“NLRA”), 29 U.S.C. § 157.
The court concluded that enforcing the waiver would prohibit the employee from exercising a substantive right to engage in concerted legal activity for mutual aid or protection—rights expressly protected under Section 7.
The Growing Federal Circuit Split
The Seventh Circuit acknowledged that its ruling conflicted with prior Fifth Circuit decisions upholding similar waivers. This disagreement among federal appellate courts created a classic “circuit split,” increasing the likelihood of Supreme Court intervention.
The legal stakes were significant. A ruling upholding mandatory class action waivers could limit employees’ ability to pursue collective remedies, particularly in wage-and-hour disputes where individual claims may be too small to litigate separately.
Substantive vs. Procedural Rights Under the NLRA
At the center of the disagreement was whether participation in a class or collective action is:
- A substantive right protected under Section 7 of the NLRA, or
- Merely a procedural mechanism that may be waived through arbitration agreements.
The Fifth Circuit treated class procedures as procedural tools. The Seventh Circuit, by contrast, held that the right to pursue collective legal action itself is substantive and protected.
The Fifth Circuit’s FAA-Based Approach
In D.R. Horton v. NLRB (5th Cir. 2013), the Fifth Circuit held that class action waivers in arbitration agreements do not violate the NLRA. The court relied heavily on the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et seq., and the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion (2011).
The Fifth Circuit reasoned that requiring class procedures would interfere with arbitration’s efficiency and conflict with the FAA’s strong federal policy favoring enforcement of arbitration agreements.
The Seventh Circuit and the NLRB’s Interpretation
The Seventh Circuit aligned with the National Labor Relations Board (“NLRB”), which has consistently interpreted Section 7 as protecting substantive rights to engage in concerted activity, including collective legal actions.
The NLRB had previously held in cases such as D.R. Horton (2012) and Murphy Oil USA, Inc. (2014) that mandatory waivers of collective action rights violate federal labor law, even in the context of arbitration agreements.
No Inherent Conflict Between the NLRA and the FAA
In Epic Systems, the Seventh Circuit concluded that the NLRA and FAA could be harmonized. Arbitration agreements are generally enforceable, but contracts may still be invalidated on grounds that exist at law or in equity.
Because the arbitration agreement required employees to waive a substantive federal right under Section 7, the court held that the agreement was unlawful and unenforceable.
Why This Issue Matters
The resolution of this circuit split would determine whether employers can require employees to waive the ability to pursue employment claims collectively through litigation or arbitration.
For employees, collective procedures often provide the only practical method of enforcing wage-and-hour protections. For employers, arbitration agreements are seen as tools to manage litigation exposure and costs.
Given the significant implications for workplace litigation nationwide, this issue has drawn close attention from courts, employers, labor advocates, and policymakers.