Friday, February 1, 2008, 2:09 PM

Fourth Circuit Rules for Employees in an Arbitration of FLSA Class Action Claims

This week, the U.S. Court of Appeals for the Fourth Circuit issued an opinion of interest concerning both the FLSA and the law of arbitration. In Long John Silver's v. Cole, (4th Cir. Jan. 28, 2008) a group of former restaurant managers and managerial assistants filed suit against their employer, claiming they were subjected to unlawful "payroll deductions and salary giveback to cover losses," which resulted in their not being paid all the compensation they earned. The employer had a mandatory arbitration agreement, so the case was submitted to binding arbitration under the rules of the American Arbitration Association (AAA). The employees then sought to make the case a class action.

The key issue in the case was a dispute over how to determine who was allowed to be in the class of plaintiffs. The employees argued the AAA's rules of class action arbitration should apply, which provide that members of the class had to affirmatively "opt out" of the case. The employer disagreed and argued that the issue was governed by the FLSA, which requires that would-be members of a class affirmatively "opt in" to be entitled to participate. The employer contended that the "opt in" procedure was a substantive right under the FLSA which could not be waived in a private agreement to arbitrate. The arbitrator agreed with the employees and applied the AAA's "opt in" rule. After the conclusion of the arbitration, which found in favor of the employees, the employer took the issue to the Fourth Circuit.

Applying the very limited scope of review allowed in arbitration cases, the Fourth Circuit affirmed the arbitration award. In sum, the Court found that it was not clear from the statute whether Congress intended the FLSA's "opt in" requirement to be a non-waivable right, and noted that no other court had ever decided the issue. Because it was "debatable" whether the FLSA's "opt in" requirement was a substantive, non-waivable right, the Court found that the arbitrator "did his job" in reaching his decision and affirmed the award.

The Fourth Circuit's decision is binding on all federal courts in Maryland, Virginia, West Virginia, North Carolina, and South Carolina. The full opinion is available on the Fourth Circuit’s website.

This decision should make employers take note for two reasons. First, if unencumbered by the FLSA's "opt in" requirement, it is easier for plaintiff-employees to bring larger FLSA collective actions against employers, even if the matter is subject to a binding arbitration agreement. Second, because of this, employers should dust off their arbitration policies and agreements to make sure they understand what cases and claims fall within the agreement, and that they actually want those cases decided in arbitration instead of in court. As this case emphasizes, once a claim is in arbitration, because of the great deference given to arbitration decisions by the courts, it is very difficult to appeal or challenge an arbitration ruling once it has been made.

Another note: This ruling cuts both ways. If a class member needn't opt in to take advantage of a favorable ruling, what if the arbitration goes against the plaintiff? Will judicial deference to the arbitration result close the door to those who never appeared in the case and whose factual circumstances may be dramatically different from those presented to the arbitrator? And what if the arbitrator finds for the plaintiff but against everyone else? With the ever-increasing pressure to avoid litigation costs in favor of the "less-expensive, faster" arbitration remedy, but the concomitant effort by the plaintiffs’ bar to make arbitration just like litigation but with almost no ability to appeal, expect this debate to continue.

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