Strategic Use of Arbitration Agreements in FLSA Context Gets Boost

In a case that has strategic implications for employers’ use of arbitration agreements in response to collective claims brought under the Fair Labor Standards Act (“FLSA”), the Eighth Circuit has held that former servers at an Arkansas pizzeria chain lack standing to challenge the pizzeria’s enforcement of an arbitration agreement that bars current employees from joining the FLSA collective action.  Conners v. Gusano’s Chi. Style Pizzeria, No. 14-1829 (8th Cir. Mar. 9, 2015).

In Conners, the plaintiff filed a proposed collective action lawsuit on behalf of herself and other restaurant servers, alleging Gusano’s maintained an illegal tip pool in violation of the FLSA.  One month later, Gusano’s distributed a new arbitration agreement to all current servers which required individual arbitration of all employment disputes, including Conners litigation.

The former servers, who were not subject to the new agreement and had moved for conditional class certification, argued that Gusano’s engaged in improper communication with putative class members and sought to preclude the pizzeria from enforcing the agreement against the current servers.  In arguing that they had standing to challenge the agreement, the former servers alleged that they had suffered “a concrete and particularized injury” in the form of an increased share of litigation expenses.  Even assuming that was true, the Eighth Circuit held that the plaintiffs could not show an “actual or imminent” threat because, at the time of the challenge to the agreement, no current employees had opted into the lawsuit, and there was no indication that the arbitration agreement had chilled the participation of any current employees.  Therefore, the plaintiffs lacked standing and the courts did not have jurisdiction to enjoin the enforcement of the arbitration agreement.

Companies facing potential class or collective actions under the FLSA or state wage laws in the Eighth Circuit should take heed of the pizzeria’s strategic use of arbitration agreements in this case.  Gusano’s acted quickly after the filing of the Conners lawsuit and issued a new arbitration policy.  Notably, the arbitration agreement contained an explanation of “its scope, the required procedures for invoking arbitration, the effect the agreement will have on the employee's ability to pursue relief in court, the right of every employee to opt out of the agreement free of retaliation, and how to opt out effectively.”  Along with the new agreement, the pizzeria issued a two-page memorandum describing the agreement’s terms in “plain English” and expressly explaining to employees that their failure to opt-out of the new policy would prevent them from joining the pending lawsuit.  By doing so, Gusano’s appears to have complied with the U.S. Supreme Court’s admonishment in American Express v. Italian Colors Restaurant, 133 S. Ct. 2304 (2012), that express contractual waivers of class arbitration are enforceable.

By acting swiftly and transparently, Gusano’s may limited the scope of the proposed collective action in Conners, and companies, particularly those in the Eighth Circuit, in similar situations should take note.  This strategy, however, is not without legal risk, and courts in other circuits may have a different view of Gusano’s course of conduct.  Employers who act too hastily and heavy-handedly in procuring signed agreements may be accused of improperly coercing employees into waiving their rights, which may nullify the waiver.  Further, if a new arbitration agreement is distributed before notice of a pending collective action has been disseminated, the employer might unintentionally inform employees about, and potentially encourage them to join, the lawsuit.

There are practical considerations as well.  Seeking a waiver of class or collective arbitrations under these circumstances may damage employee relations and erode employee morale if employees perceive that their employer is attempting to unfairly restrain the rights.  In addition, an employer may be subjected to increased fees if a number of employees bring individual arbitrations or if employees file suit in court and forces the employer to move to enforce the arbitration agreement.  Each of these considerations must be weighed carefully before instituting a new policy.