7th Circuit Remands $10 Million Award in Collective Arbitration of FLSA Wage Claims for Threshold Determination by District Court of Whether Employment Contract Permits Class or Collective Arbitrations of Employment-related Claims.

On October 22, 2018, the 7th Circuit ruled that the district court erred in invalidating a waiver clause in the parties’ arbitration agreement, vacated the district court’s order enforcing a $10 million arbitration award in a collective action under the Fair Labor Standards Act for multiple wage claims, and remanded the case to the district court to conduct the threshold inquiry regarding class or collective arbitrability to determine whether the arbitration clause of the employment agreement authorizes collective arbitration. Herrington, et al. v. Waterstone Mortgage Corporation, No. 17-3609 (7th Cir. 10/22/2018). The plaintiff-employee filed a collective action against her employer for alleged minimum wage and overtime wage and hour violations of the Fair Labor Standards Act (“FLSA”). A collective action allows similarly situated employees to opt in to the lawsuit. The district court compelled arbitration pursuant to the arbitration agreement between the employer and employee, but struck down as unlawful a waiver clause that appeared to forbid class or collective arbitration of the plaintiff’s claims. The arbitrator conducted a collective arbitration over the employer’s objections and awarded more than $10 million in damages and attorneys’ fees to the plaintiff and 174 similarly situated employees.

However, the recent U.S. Supreme Court decision in Epic Systems Corp. v. Lewis, _U.S._, 138 S.Ct. 1612 (2018) puts the award in doubt because in Epic, the Supreme Court upheld the validity of waiver provisions like the one in the plaintiff’s employment agreement. If imposing collective arbitration violated the waiver, the district court must vacate the award. On appeal, the employer argued that because the waiver is valid under Epic, the collective arbitration violated the arbitration agreement. In Epic, the Supreme Court upheld arbitration agreements that require single-claimant arbitration of employment-related claims and force employees to waive their right to pursue class or collective actions of employment-related claims. In light of Epic, the district court was wrong to treat the waiver as unlawful. However, the district court must still interpret the arbitration agreement, including the waiver, to determine the initial question of whether the parties agreed to arbitrate and whether the arbitration agreement authorized the collective arbitration that occurred. The 7th Circuit held that resolution of this initial question of arbitrability is for the district court, not the arbitrator, to determine in the first instance. If the district court determines that the agreement allows a collective arbitration, the district court may confirm the arbitration award. If, however, the district court determines that the agreement requires single-plaintiff arbitration, then it should vacate the award and send the dispute back to the arbitrator for a new proceeding.