Many employers, for good reason, dread the expense, complications and risks associated with employee class-action lawsuits. For example, wage and hour litigation, a hotbed for class-action lawsuits, increased in 2014, rising from 7,882 cases filed in 2013 to 8,066 cases filed in 2014. And although the numbers are not yet in for 2015, most experts anticipate a similar increase.

Fortunately for employers, courts across the country (including the United States Supreme Court) increasingly support employers’ ability to enter into individual arbitration agreements with employees, in which the employer and employee agree that any disputes that may arise between them, such as a wage and hour dispute, will be resolved through binding arbitration, rather than the courts. In addition, parties can also include a class-action waiver, mutually agreeing that neither party will seek litigation or arbitration in a class setting. Such agreements benefit both parties, since arbitration is generally faster, cheaper and less stressful than traditional litigation, and allows the parties to resolve their disputes in a less adversarial and timely forum.

However, despite arbitration’s growing acceptance from the courts, these agreements have been vilified by the plaintiffs’ bar, as well as the National Labor Relations Board (NLRB), which enforces federal labor law. The NLRB, despite several setbacks in the courts, has taken the position that arbitration agreements with class-action waivers in the employment setting violate federal labor law and are, therefore, unenforceable.

With the Supreme Court on one side of the issue and the NLRB firmly on the other, it’s important for employers to fully understand the pros and cons of arbitration agreements with class-action waivers, especially in an era of increased employment-related litigation.

The Basics of Arbitration and Class-Action Waivers

Arbitration provides an avenue for settling disagreements without involving the traditional court system. It’s a form of “alternative dispute resolution,” which can also include mediation, and is designed to be less expensive, quicker and less formal than traditional litigation. In addition, although the parties do have access to discovery during the arbitration proceeding, discovery is typically limited and streamlined to promote efficiency in the proceeding.

Arbitration bears many similarities to a traditional trial. Both sides make opening statements and present evidence. An impartial arbitrator listens to claims, facts and testimony from both sides, then issues a decision. In most arbitrations, there are very limited opportunities to appeal an adverse ruling. Consequently, most arbitration decisions are final and binding.

Arbitration agreements with class-action waivers include an agreement between the employee and the employer that any disputes will be resolved in individual arbitration. This can be extremely helpful in preventing costly class-action wage and hour or discrimination cases that can drag on for years and result in significant exposure and attorneys’ fees.

The Evolving Case Law

In recent years, courts have upheld the right of employers to require employees to sign agreements that mandate arbitration between the parties, as long as the agreements are fair to employees and are not one-sided in favor of the employer.

The Federal Arbitration Act (FAA) has long established a liberal federal policy favoring the enforcement of arbitration agreements according to their terms. However, some states have limited enforcement of arbitration agreements, citing fairness concerns. In 2011, the U.S. Supreme Court issued its seminal decision in AT&T Mobility v. Concepcion, where the court confirmed the over-arching enforcement policy of the FAA. The Supreme Court overruled a California statute that sought to preclude class-action waivers in certain circumstances. This decision was widely praised by the business community because it brought much-needed clarity to the enforceability of arbitration agreements. In addition, recent court decisions have built upon Concepcion, thereby increasing the enforceability of these agreements.

There has been, however, some push back against arbitration agreements in the employment setting. In 2012, in a case against D.R. Horton Inc., the NLRB ruled that class-action waivers in arbitration agreements violate Section 7 of the National Labor Relations Act, which provides workers the right to engage in “concerted activity” for mutual aid and protection. The NLRB argues that class-action waivers prevent employees from acting in concert to address common concerns, and that federal labor law preempts the FAA.

Fortunately for employers, the NLRB’s position hasn’t found support in the majority of courts that have examined the question. In fact, the NLRB’s D.R. Horton decision was overturned by the Fifth Circuit Court of Appeals, which held that class- and collective-action waivers in employment arbitration agreements do not violate federal labor law and are enforceable, as long as employees maintain the right to bring actions as individuals.

Notwithstanding the NLRB’s position, the federal courts and almost all state courts are in agreement that arbitration agreements with class-action waivers are valid and enforceable.

Next Steps

Despite the uncertainty created by the NLRB, an arbitration agreement, especially one containing a class-action waiver, can provide real benefits to employees and employers alike. Thorough and consistent agreements can go a long way toward heading off potential confusion — and possible lawsuits or regulatory actions. There are, however, several considerations when updating or implementing class-action waivers:

Consider whether arbitration agreements are the right fit. Although arbitration agreements with class-action waivers have many benefits, such agreements many not be right for all employers. Consider your company’s litigation exposure, and the pros and cons of implementing such agreements. Arbitration agreements typically provide for cheaper and faster resolution of disputes, class-action waivers, greater confidentiality, increased informality and a more predictable process. However, downsides include employee resentment, confusion over rights, reduced discovery during a dispute and the inability to appeal. Generally speaking, the ability to preclude class-action litigation provides a significant benefit for all but the smallest employers.

Make sure agreements are fair and legal. To stay out of legal trouble, arbitration agreements need to apply equally to both sides. That means that employers need to agree to submit to arbitration over disputes if they expect employees to do so. The ground rules for choosing an arbitrator also need to apply to employers and employees — employers can’t make such decisions without employee input.

Any agreement should allow for exceptions, since some types of disputes are typically exempt from alternative dispute resolution. For example, workers’ compensation claims must go before the appropriate state agency, and employees have rights to bring discrimination claims directly to the U.S. Equal Employment Opportunity Commission. Some types of whistle-blower lawsuits also may not be subject to mandatory arbitration.

Finally, the enforceability of arbitration agreements vary greatly state to state. It’s extremely important to work with experts in the HR department, and with in-house and outside attorneys to make sure any agreement you adopt is legal and enforceable.

Educate employees. Once an arbitration agreement has been drafted or updated, employers should ensure employees understand what the agreement means and what their rights are once they sign it. While some employees may balk at the idea of signing an arbitration agreement, a well-written agreement should also work in their favor. Take the time to explain the advantages so employees understand how signing the agreement will benefit them as well.

Stay current and flexible. Since courts and regulatory agencies regularly look at class-action waivers, employers need to stay on top of any new developments. This is particularly true now since the courts and the NLRB are at odds over class-action waivers. Attorneys and trade groups can be excellent sources of information for these types of updates. Companies should also regularly review the waivers, along with other aspects of their employment agreements, to make sure they are still relevant.

 Despite the NLRB’s rulings, class-action waivers can be a smart approach to minimize the chances of multiple employees filing lawsuits. By planning carefully, staying on top of changes in regulations and working with trusted advisors, employers can implement agreements that will proactively limit many of the headaches associated with employment-related litigation.