Recently, the Seventh Circuit Court of Appeals in Chicago held in Lewis v. Epic Systems Corporation that a mandatory agreement between the employer (Epic) and its employees requiring arbitration of wage and hour claims on an individual basis ran afoul of employees’ rights “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection” under Section 7 of the National Labor Relations Act (NLRA). Other circuit courts, including the Fifth Circuit in D.R. Horton, Inc. v. NLRB have come out the other way and upheld mandatory arbitration agreements that require employees to arbitrate wage and hour claims and that waive an employee’s ability to bring class or collective claims.

Epic required some of its employees to sign, as a condition of continued employment, an arbitration agreement “mandating that wage and hour claims could be brought only through individual arbitration and that the employees waived ‘the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.’” An employee, Lewis, signed the agreement but later sued Epic in federal court on his behalf and on behalf of other employees for alleged wage and hour violations. Epic asked the district court to dismiss the case and asked the court to force Lewis to arbitrate his dispute on an individual basis. Lewis claimed that the arbitration agreement was unenforceable because it interfered with his and his colleagues’ right to engage in protected, concerted activity under NLRA. The district court ruled for Lewis.

On appeal, the Seventh Circuit noted that since as early as 1940, courts have held that contracts “stipulat[ing] . . . the renunciation by employees of rights guaranteed by the [NLRA]” are unenforceable. See National Licorice Co. v. NLRB, 309 U.S. 350 (1940). The Court also noted that the National Labor Relations Board has long found unenforceable “employer-imposed, individual agreements that purport to restrict Section 7 rights.” Using this as the framework for its decision, the Seventh Circuit found that Epic’s arbitration agreement, which mandated that wage and hour claims be brought through individual arbitration and required employees to waive “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding,” violated employees’ rights under the NLRA to engage in concerted activities.

The Court noted that “[c]ollective or class legal proceedings fit well within the ordinary understanding of ‘concerted activities,’” and that these actions “allow employees to band together” and “equalize bargaining power,” which is the essence of the NLRA’s protections. Because the provisions of Epic’s agreement “run[] straight into the teeth of Section 7,” the Court determined that the agreement interfered with employees’ rights, and therefore violated the NLRA.

Finally, the Court rejected Epic’s argument that its arbitration agreement was enforceable under the Federal Arbitration Act (FAA). According to Epic, the FAA, which favors the enforcement of arbitration agreements, overrides the NLRA. The Court saw it differently. Having concluded that Epic’s arbitration agreement was unenforceable, the Court explained that the FAA could not be used to “resuscitate” an unenforceable arbitration agreement.

The Seventh Circuit’s decision likely will not be the last word on mandatory arbitration agreements, class action waivers, and protected activity under the NLRA. The Court acknowledged that its decision conflicts with the Fifth Circuit’s D.R. Horton decision and possibly with cases from at least two other circuits. We expect the Supreme Court will be asked to step in and resolve the circuit split.  For now, employers within the Seventh Circuit (Illinois, Indiana, and Wisconsin) who have or are considering mandatory arbitration agreements and class action waivers will have to analyze their options in light of Epic.