It's Good To Be King: Effect of Abritration Agreements on FLSA Enforcement

This past week, on September 23, 2021, the Department of Labor (“DOL”) published a news release regarding the affect that agreements to arbitrate between employees and employers have on the DOL’s ability to institute their own enforcement action. You can view that news release here: https://www.dol.gov/newsroom/releases/sol/sol20210923. It features a favorable ruling received on August 25, 2021 that allowed DOL to proceed to enforce wage rights notwithstanding an employee’s agreement to arbitrate. Since DOL is pushing the story, it is no surprise that there was a favorable decision for the DOL.

In January of this year, DOL filed a lawsuit in the Eastern District of New York to recover back wages for some 200 plus employees under the Fair Labor Standards Act (“FLSA”), citing a failure to keep accurate records, and seeking to enjoin the employer from continuing to utilize these practices. In response, the employer moved to compel arbitration of these claims, pointing to an arbitration agreement between the employees and the employer. The employer argued that this arbitration agreement bound DOL just like it would bind the employees from bringing a lawsuit to recover back wages. DOL argued that they were not a party to the arbitration agreement and thus were not bound by it. The Eastern District of New York agreed with DOL.

In reaching its decision, the court discussed arbitration agreements as a whole. The court stated that federal policy favored arbitration and cited the Supreme Court as saying that the Federal Arbitration Act requires courts to vigorously enforce arbitration agreements. (citing Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1621 (2018)). However, like the court in our previous blog (https://www.awrcounsel.com/blog/2021/9/17/placeholder) that discusses arbitration agreements in the context of Davis-Bacon Act job classification, the district court here mentioned that “Arbitration is strictly a matter of consent.” (citing Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287, 299 (2010)). This proved fatal to the employer as DOL never signed any sort of arbitration agreement.

But, the employer never really argues that DOL was part of this agreement, and they don’t allege any facts to suggest that a representative of DOL was involved. Instead, they argued that DOL acted on behalf of the different employees whose wages weren’t being paid correctly. Additionally, they argued that agents who act on behalf of a principal can often be bound by agreements that the principal enters into. Here, the employer suggested that DOL acts as a sort of agent for the employee and therefore should be bound by the same agreement that binds the employee as the principal. But, like arbitration, a key part of the agency relationship is consent, and there is no evidence that DOL and the employees agreed to enter into any type of agency relationship.

The court also considered a Supreme Court case where the EEOC filed an enforcement action against an employer who allegedly violated the American with Disabilities Act. Similar to this case, the employer entered into an arbitration agreement with its employees and attempted to compel the Equal Employment Opportunities Commission (“EEOC”) to arbitration. The Supreme Court held that the EEOC was “the master of its own case” and allowed the suit. EEOC v. Waffle House, Inc., 534 U.S. 279 (2002). Additionally, the court noted that the Second Circuit has said that “agreements of private parties cannot frustrate the power of a federal agency to pursue the public’s interests in litigation.” Cohen v. Viray, 622 F.3d 188, 195 (2d Cir. 2010). For these reasons, the court found that DOl could proceed.

The effect of this is to dispose of the principle that DOL enforces the FLSA on behalf of the rights of employees. Instead, this holding makes it clear that the FLSA confers two separate rights, one to the employees, and one to DOL to enforce and sue under the act. This has been a theme throughout the evolving legal landscape of the FLSA. For example, when DOL allowed employers to voluntarily report violations of the FLSA in return for not seeking liquidated damages, this in no way prevented the employees that the employers underpaid from instituting their own cause of action for the difference between whatever settlement DOL presented, and what the employees would receive from prevailing in a private lawsuit.

Thus, employers who purposefully or accidently violate the FLSA will find that the Act is a two-headed dragon, with both DOL and private enforcement always possible, and they need to be careful about both heads in order for them to avoid being eaten.

To read the decision from the Eastern District of New York yourself, you can view it here: https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/2021/09/SOL20211643_%20Order%20Denying%20Motion%20to%20Compel%20Arbitration%20(CSE).pdf.