On July 30, 2014, the Sixth Circuit Court of Appeals invalidated a collective action waiver signed as part of a separation and release agreement. The ruling is significant because it is the first time a federal appellate court has addressed the validity of Fair Labor Standards Act (FLSA) collective action waivers outside the context of arbitration.
The plaintiffs were sales representatives who claimed their employer improperly classified them as ineligible for overtime pay under the FLSA's outside sales exemption. The district court had dismissed from the collective action individual sales representatives who signed collective action waivers as part of separation and release agreements, holding that the waivers were valid. The lower court had borrowed from arbitration case law and concluded that "[w]ithout…showing [that] the waiver …" nullifies the purposes of the statute or "thwart[s] legislative policy," the collective action waiver does not "offend the purposes of the FLSA."
However, the Sixth Circuit disagreed. The court considered itself obligated to invalidate the waivers due to its ruling in a 2013 case that an employee cannot be bound by a contract with an employer that limits the employee's rights under the FLSA. The court disregarded the employer's citation to case law upholding arbitration collective action waivers as distinguishable. The court reasoned that permitting waivers of employees' FLSA collective action rights would give the employer an unjust advantage over its competitors and would discourage employees from bringing individual claims for overtime wages because the potential recovery would be outweighed by the costs of litigation.
The Sixth Circuit's decision rests against the backdrop of the U.S. Supreme Court's decision in AT&T Mobility LLC v. Concepcion. In that case, the Supreme Court held that the Federal Arbitration Act trumps state laws invalidating arbitration class and collective action waivers. It will be illuminating to see whether other circuit courts continue to distinguish the validity of class and collective action waivers inside and outside arbitration, particularly given that they will not be bound by the precedent upon which the Sixth Circuit relied. Stay tuned.