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May|June 2004
Sucker Punch By Chris Mooney
Locked Out By Kate Andrias

Locked Out

What do Circuit City, Waffle House, and Labor Ready have in common? The companies all force employees to sign away their rights to go to court.

By Kate Andrias

CHEATED OUT OF HUNDREDS OF MILLIONS OF DOLLARS of overtime pay, Wal-Mart employees in 28 states have filed lawsuits. In New York, several hundred delivery workers at the Gristedes supermarket chain just won a $3.2 million settlement; they were paid less than $3 an hour for shifts lasting 10 to 12 hours a day. Similar suits are pending against the national drugstore chain Eckerd and the uniform company Cintas, both of which allegedly misclassified their employees as "salaried" in order to avoid paying overtime to those who work more than 40 hours a week.

Employers have noticed the trend, and they're taking measures to shield themselves. Companies like Circuit City, Waffle House, and Labor Ready are demanding that their employees waive the right to pursue employment-related claims in court. Under these waivers, known as mandatory dispute resolution agreements, workers must resolve any work-related legal claims against their employers through private arbitration. The American Arbitration Association now provides dispute resolution services to 600 companies covering seven million employees.

The Supreme Court has endorsed this practice of employer-mandated arbitration in a series of cases since 1991. It has found that Congress sought to end judicial hostility to private arbitration agreements when it passed the Federal Arbitration Act in 1925. Arbitration, the court concludes, is therefore a preferred method of resolving disputes. For many years, this private process gave businesses a relatively cheap, informal, and efficient mechanism for resolving disagreements with other businesses. But, in the last decade, companies ranging from credit card distributors to cellphone providers have also begun requiring consumers to resolve any disputes through arbitration. Employees are being asked to sign similar arbitration agreements as a condition of employment. Proponents of arbitration argue that it offers a better alternative to employers and employees involved in a dispute than protracted litigation in the overburdened federal courts.

But arbitration has serious drawbacks. It moves critical issues out of the public justice system and into a private decision-making world where opinions are not published, precedent is not made, and conflict is kept secret from the media. In addition, arbitration is often prohibitively expensive for low-wage workers. Employees must pay filing fees just to initiate a case—as much as $750. These fees do not cover the arbitrator's charges, which range from $200 to $500 per hour split between the parties, for arbitrations that may last days, weeks, or even months. Though an arbitrator can later shift the fees to the employer, employees take a risk that they will have to pay at least part of the bill.

Perhaps most troubling, many arbitration agreements don't allow collective action. Under these agreements, class-action suits like the ones challenging Wal-Mart could never have proceeded. Instead, each of the hundreds of thousands of workers would have had to hire a lawyer, file her own claim, pursue her own arbitration, and win her individual case. And, in the end, arbitration would at most offer compensation to that single worker; it could not redress systemic labor violations suffered by all of her colleagues, nor could it provide enough monetary relief to deter future violations.

Despite these problems, courts are enforcing arbitration agreements that require employees to proceed one by one. A decision in 2002 by the Fourth Circuit Court of Appeals compelled arbitration of a case under an agreement banning class actions. In Adkins v. Labor Ready, Inc., Curtis Adkins and 63 other temporary workers who were paid between $5.15 and $6 an hour filed suit under the 1938 Fair Labor Standards Act, or FLSA, to be paid for work that they say was not compensated. The employer objected to the litigation, arguing that the workers could not go to court because of arbitration agreements they had signed. The Fourth Circuit agreed. In less than a paragraph, the court wrote off the workers' rights to class action. The court reasoned that the workers had exercised their right to bargain about judicial remedies granted by the statute and that nothing in the text, legislative history, or purpose of the FLSA indicated Congress wanted to prevent employees from signing away their rights to class actions.

With even less consideration of the issue, the Eighth Circuit recently ordered employees out of court and into arbitration in Bailey v. Ameriquest Mortgage Company. In that case, telemarketers (termed "account executives" by their employer) brought suit under the FLSA for unpaid overtime work. The district court would not order arbitration, in part because the agreement did not allow class actions. On appeal, however, the Eighth Circuit reversed, without dedicating a single line to the issue of class actions. The responsibility of determining whether the contract was enforceable was out of its hands: It fell to the arbitrator, not the federal courts.

THESE DECISIONS AND OTHERS LIKE THEM threaten to undermine seven decades of labor protections. In passing the FLSA during the Great Depression, Congress intended to eliminate substandard wages and excessive hours. Congress created two mechanisms for enforcing the law: actions by the Department of Labor and private lawsuits. The Department of Labor has never had the resources to investigate all labor violations on its own. And the number of investigators who look into complaints about wages and hours has steadily declined since 1980. Lawsuits brought by groups of workers, on the other hand, have been a critical tool in making the FLSA stick.

While the Supreme Court has held that there is a strong presumption in favor of enforcing arbitration agreements, it has also made clear that arbitration agreements cannot be enforced if they prevent litigants from vindicating their statutory rights. The court has written that arbitration should not be required when an "inherent conflict" exists between arbitration and the FLSA's underlying purposes.

Barring collective action constitutes an inherent conflict with the purposes of the FLSA. Unlike many other statutes, the FLSA expressly provides a right to collective action. The statute allows workers to bring suits on behalf of similarly situated employees. In 1947, when Congress cut back on FLSA provisions favorable to employees, like the ability of unions to bring actions on behalf of their members, it chose to maintain their right to collective action.

When it passed the FLSA, Congress emphasized not only the individual worker's right to a minimum wage but also the need for fairness. Congress stated that the bill's purpose was "to correct and as rapidly as practicable to eliminate" unfair labor conditions. At the time, millions of industrial workers worked long hours for low pay and the country faced widespread labor unrest. As President Franklin D. Roosevelt put it, up to one-third of the population was "ill-nourished, ill-clad, ill-housed." The FLSA would make real "the promise of American life."

The Fourth Circuit missed all this in its cursory treatment of Curtis Adkins and his colleagues. It relied on a brief statement from an earlier Supreme Court case that minimized the importance of collective remedies. But the analogy was not apt, as that earlier case involved a wealthy securities professional who had brought an individual age discrimination claim and whose agreement did provide for collective action. To date, the Supreme Court has not directly considered whether arbitration agreements can prohibit class actions.

The question of whether employees can sign away their rights to litigate wage claims collectively is not going away. Take, for example, Labor Ready, one of the largest providers of manual day labor, with 600,000 workers nationwide. If the average Labor Ready worker is anything like Curtis Adkins and his co-plaintiffs, he is working long hours in a low-wage job like garbage hauling, construction, or janitorial services. But as day laborers, the workers of Labor Ready supposedly terminate their employment—"quit"—at the end of each working day, so the company doesn't have to provide them with benefits.

We can't really expect the 2.1 million American workers earning minimum wage or lower—less than $11,000 a year for a 40-hour week—to pay thousands of dollars enforcing their claims in private arbitration. That's not the system Congress intended when it provided for collective enforcement of systemic wage and hour violations. In cases involving allegations of widespread labor abuses, class actions must be allowed. It's not enough to have wage laws: Workers must be able to enforce them.

Kate Andrias is a third-year student at Yale Law School.

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