The Supreme Court Says Yes to Arbitration and Class Action Waivers

With its 5-4 ruling in Epic Systems Corp. v. Lewis, the Supreme Court delivered a seemingly big win for employers. The Supreme Court held that employees’ waiver of their rights to bring collective or class actions, as a term of an arbitration agreement, is valid and enforceable. This ruling rejected the NLRB’s position that such waivers are invalid given the NLRA’s grant to employees of “the right . . . to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for . . . mutual aid and protection.” A blog post on Declassified provided a legal analysis of the Epic Systems opinion from a class action—as opposed to employment—standpoint. The Supreme Court has now definitively resolved that employers can use arbitration agreements to prevent employees from bringing a collective action.

But Corporate America Is Conflicted

Does This Arbitration Agreement Make Me Look Sexist? <i>The Moving Target of Using Arbitration Clauses</i>Ironically, at the very moment the Supreme Court has made it easier for employers to double down on arbitration agreements, some businesses are making headlines by curtailing arbitration terms for certain claims. It’s safe to say that the #MeToo movement has something to do with it.

Last week, after months of scrutiny and negative publicity, Uber announced that it would “no longer require mandatory arbitration for individual claims of sexual assault or sexual harassment by Uber riders, drivers or employees.” As NPR reported, Uber’s new policy does not apply to claims brought as class actions.

Uber wasn’t the first to take this step. In December 2017, Microsoft publically endorsed legislation that would protect sexual harassment victims’ ability to bring a case in court instead of in arbitration where they could be prohibited from speaking of the incident. In the same statement, Microsoft announced its own new policy and waived its contractual requirements for arbitration of sexual harassment claims.

Even some law firms have had to adapt their employment agreements in the wake of #MeToo. Posts of Munger Tolles & Olson’s summer employment contract, which effectively mandated arbitration for harassment claims, garnered unwanted attention on social media. In response, the firm released its own tweet statement that it would “no longer require any employees, including summer associates, to sign any mandatory arbitration agreements.”

#arbitrationwhatnow?  

While employers have weighed the costs of arbitration versus litigation for decades, the current environment requires new considerations. Are the cost savings of an arbitration agreement (including the ability to maintain confidentiality and prevention of class claims) worth the risk of a social media firestorm? Should you carve out individual harassment claims from mandatory arbitration (ala Uber) or risk class treatment, and carve out all harassment claims (ala MicroSoft)? In the throes of #MeToo, it’s important to consider these new costs and benefits. A simple test: If you wouldn’t want it to go viral on Twitter, reconsider.

“It Wasn’t Me!” – Sixth Circuit Rules that Management Consultant Wasn’t Joint Employer under the WARN ActCan your consultant-consultee relationship with an employer who allegedly violates the Worker Adjustment and Retraining Notification (WARN) Act subject you to liability as well? Not according to the U.S. Court of Appeals for the Sixth Circuit. In McKinney v. Carlton Manor Nursing and Rehabilitation Center, Inc., former nursing home employees sued Carlton Manor and its management consultant for alleged violations of the WARN Act.

The Facts

In July 2013, the Ohio Department of Health cited Carlton Manor for failing to meet 27 federal health and safety regulations and gave it until January 2014 to fix the problems. Carlton Manor hired Sovran, a management consultant, to help and by the deadline had resolved 26 of the 27 deficiencies. The health department rejected its plan to comply with the final regulation and began the process of revoking Carlton Manor’s operating license. The nursing home closed soon after.

Before closing, Carlton Manor gave little notice to its employees (and certainly not the 60 days the WARN Act requires). Consequently, Debi McKinney filed a putative class action against Carlton Manor and Sovran under the WARN Act. Although the employees received a default judgment against Carlton Manor, they received nothing because the nursing home had no assets. As one would expect, they turned to Sovran, the only solvent defendant in the case. However, the employees still hit a brick wall, as the district court ruled that Sovran was not liable under the act because it was not the employees’ employer and did not decide to close the nursing home. The district court granted summary judgment for Sovran, and the employees appealed.

The Sixth Circuit’s Opinion

In reaching its ruling, the Sixth Circuit first focused on the words of the WARN Act, explicitly articulating that “employers” were liable for violations. Specifically, “[o]nly ‘employers’ that ‘order[ed]’ a plant closing face[d] regulation by the Act or liability under it.” The Sixth Circuit emphasized that there was no dispute that Carlton Manor, not Sovran, employed the nursing home workers. Likewise, Carlton Manor, not Sovran, made the final decision to close the nursing home. Based on these facts, Sovran was not an employer under the terms of the act.

Despite McKinney’s attempt to argue that Sovran and Carlton Manor were either a “single employer” or “separate employers,” the Sixth Circuit easily rejected these theories. On the single employer theory, the Sixth Circuit held that none of the factors that make two entities a single employer were present. There was no common ownership, they did not share any directors, officers, or personnel policies, and they kept separate payrolls. They also operated two distinct businesses that were not dependent on each other. Although the court acknowledged that one might argue that Sovran exercised some control over Carlton Manor employees (it allegedly had the authority to fire nursing home employees), it was unclear if this power was the type of control that would indicate that Sovran and Carlton Manor were a single employer. Thus, while no one factor was dispositive in determining whether the entities were a single employer, McKinney could not meet any of the listed factors, and her first argument failed.

Regarding the defendants being separate employers, the Sixth Circuit reiterated that the factors in the WARN Act’s regulations, whether examined singly or taken together, did not show that Sovran was McKinney’s separate employer. There was no evidence that Sovran hired McKinney, fired McKinney, or otherwise treated her as one of its employees. Furthermore, there was no evidence that Sovran ordered the closing of the nursing home. The court explained that Sovran and Carlton Manor had a consultant-consultee relationship in which Sovran offered management advice to Carlton Manor, but never became the owner of the nursing home in the process. As such, Sovran was not liable to McKinney, or any other nursing home employees, under the WARN Act.

Practice Points

So what should a consultant do to protect itself from being deemed either a single employer with its consultee or a separate employer of its consultee’s employees? Follow Sovran’s example, and keep the factors that constitute a joint employment relationship in mind so that you actively avoid them.

  • Keep your business distinct and independent of your consultee.
  • Do NOT share ownership with your consultee.
  • Do NOT share common directors or officers with your consultee.
  • Do NOT share personnel policies, employee handbooks, and/or policy and procedure manuals.
  • Most importantly, do NOT exercise control over the terms and conditions of employment of your consultee’s employees or over the consultee’s business operations.