Supreme Court building.JPGThe Supreme Court has declined to grant review of a Sixth Circuit decision that cast significant doubt on the effectiveness of an employee’s waiver of Fair Labor Standards Act (FLSA) collective action rights. Last summer, the Sixth Circuit became the first federal appellate court to address an employee’s waiver of rights to participate in a FLSA collective action outside the context of arbitration. There, the court invalidated a collective action waiver in a severance agreement, which was a blow to employers. Although the Supreme Court’s denial of certiorari was without comment, it is likely the Court declined to hear the case because the Sixth Circuit’s decision arguably created no circuit split for the Court to resolve since it did not involve an employer’s attempt to compel arbitration.

The plaintiffs were sales representatives who had claimed that their employer improperly classified them as outside salespeople exempt from overtime pay under the FLSA. Several of the sales representatives had signed standard FLSA collective action waivers as part of a general release and waiver contained in their separation agreements. Citing arbitration case law, the district court concluded that “[w]ithout…showing [that] the waiver …” nullifies the purposes of the FLSA or “thwart[ed] legislative policy,” the collective action waiver did not “offend the purposes of the FLSA,” and was therefore valid. However, the Sixth Circuit disagreed, invalidating the waivers under a 2013 decision holding that an employer cannot bind an employee by a contract that limits the exercise of FLSA rights. Distinguishing the severance agreements’ waivers from those in agreements to arbitrate disputes, the Sixth Circuit reasoned that employers would gain an unjust advantage over competitors and would discourage employees from bringing individual claims under the FLSA because any potential individual recovery would be outweighed by the costs of litigation. This holding, however, appears to conflict with Supreme Court dicta from a 2013 case:

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.”

The Sixth Circuit noted that there were no conflicts on this issue with other appellate court decisions. The court reasoned that other appellate decisions only examined class or collective action waivers under the auspices of arbitration agreements, which implicated the Federal Arbitration Act, rather than the FLSA. The employer, KeHE Distributors, countered by asserting that these other decisions involved interpretation of the FLSA, rather than the Federal Arbitration Act. The employer further argued that other federal courts found nothing “in the text, legislative history or purpose of the FLSA” to suggest Congress “intended to confer a non-waivable right” to class litigation of FLSA claims.” The employer claimed that none of the other decisions turned on anything unique about arbitration.

In its petition to the Supreme Court, the employer contended that the Sixth Circuit ruling conflicted with many appellate decisions, including a Supreme Court decision, because although those cases dealt with arbitration agreements, they were at bottom cases about the waiver of rights under the FLSA. The employer argued that other courts had uniformly held that the FLSA did not create a substantive right to collective actions, and that employees could waive the ability to participate in collective actions as a quid pro quo for consideration they received in severance agreements.

Employer Insights

Presumably, the Supreme Court would take another look at this question if presented with a split of authority in the appellate courts, rather than the claimed split presented by arbitration versus non-arbitration decisions. In a better case, the employer’s argument that there is little reason to treat class or collective action waivers under the FLSA differently based on the presence of an arbitration clause makes logical sense. For now, in the states of Kentucky, Michigan, Ohio, and Tennessee, employers have another potential drafting issue to consider when they seek waivers of FLSA claims. Employers, whose settlement agreements include FLSA waivers by default, rather than to address a specific claim or controversy, may wish to reconsider their inclusion, while employers who explicitly settle FLSA issues should examine whether adding targeted arbitration clauses makes sense in light of the Sixth Circuit’s position. We will continue to monitor cases in other circuit courts to see if they, too, will limit employer/employee agreements in a similar way when they examine FLSA class or collective action cases that do not involve arbitration provisions.