Appeals Court Says No FLSA Notice for Employees Who Agree to Arbitrate

On January 24, 2020, the U.S. Court of Appeals for the Seventh Circuit announced a new standard by which a district court should evaluate whether notice of an FLSA collective action should be sent to employees who may be subject to mandatory arbitration agreements with their employers.  In Bigger v. Facebook, Inc., the court held that notice of an FLSA collective action may not be sent “to any employee whom the employer shows entered a valid arbitration agreement, unless the record reveals that nothing in the agreement would prohibit that employee from participating in the action.”

The plaintiff, Susan Bigger, filed a proposed collective action under the FLSA, alleging that Facebook had violated the FLSA’s overtime requirements by misclassifying her and other similarly situated employees as “exempt” under the statute and failing to pay them overtime pay for hours worked over 40 in a workweek.  The lower court concluded that a group of employees that were similarly situated to Bigger existed and authorized the issuance of notice to the putative class, notifying them of the lawsuit and allowing them the opportunity to join the lawsuit by “opting in” to the action.  Facebook opposed the issuance of notice to class members on the grounds that a majority of the class had executed mandatory arbitration agreements prohibiting participation in the underlying lawsuit and appealed the lower court’s decision, arguing that the district court had abused its discretion by authorizing that notice be sent.

In a matter of first impression, the court recognized the ultimate goals of “enforcement and efficiency” associated with the collective action mechanism, which was designed to efficiently remedy wage and hour violations, as opposed to having to deal with hundreds of isolated lawsuits involving the same set of underlying facts.  On the flip side, the court acknowledged that FLSA collective actions could be exploited by allowing a plaintiff to expand the pool of potential claimants, which, in turn, “increases pressure to settle, no matter the action’s merits.”  Against the backdrop of these conflicting positions, the Seventh Circuit noted that courts “must be scrupulous to respect judicial neutrality” when evaluating the efficacy of allowing the issuance of a court-authorized notice inviting putative class members to join similar FLSA claims in a single action.  

In reaching its decision and remanding the case back to the district court, the Seventh Circuit held that an employer must be given the opportunity to show that individuals set to receive notice of an FLSA collective action “entered mutual arbitration agreements waiving their right to join the action,” thereby excluding them from participation in the lawsuit.  The Seventh Circuit then laid out the framework to be employed by district courts “when a defendant opposes the issuance of notice by asserting that proposed notice recipients entered mutual arbitration agreements.”  Under the Seventh Circuit’s test, if no plaintiff contests the defendant’s assertions regarding the existence of valid arbitration agreements, then those putative class members who are subject to valid arbitration agreements should not receive notice of the FLSA collective action.  If, however, a plaintiff does contest the employer’s assertions, then the parties must be allowed to submit additional evidence on the existence and validity of arbitration agreements before authorizing notice to any alleged “arbitration employees.”  From an evidentiary perspective, the burden is on the employer to establish, by a preponderance of the evidence, the existence of a valid arbitration agreement for all employees sought to be excluded from receiving notice.  

While the Bigger decision is clearly good news for employers who have established alternative dispute resolution/mandatory arbitration agreements applicable to their work forces, it does raise several questions that remain unanswered.  For example, the Seventh Circuit did not describe the nature of the evidence that an employer would need to present in order to establish the existence of valid arbitration agreements and whether a showing would need to be made for every single putative class member.  Moreover, under the Seventh Circuit’s new framework, it would appear that some level of discovery would need to be conducted in the preconditional certification stage of an FLSA collective action where arbitration agreements are at issue, which will likely add to the overall litigation costs associated with what are already expensive pieces of litigation.  Ultimately, it is worth monitoring how the district court addresses these open issues as it applies the Seventh Circuit’s new test on remand.