By Elizabeth Roff
The U.S. Supreme Court limited an employer’s ability to enforce an arbitration agreement in labor disputes under the Fair Labor Standards Act (FLSA) in its recent decision of Morgan v. Sundance, Inc., 142 S.Ct. 1708 (2022). Morgan serves as a cautionary tale to employers: delaying a demand for binding arbitration may constitute a waiver of the right to arbitrate. A best practice for employers is to demand binding arbitration expeditiously.
In Morgan, an employee of a Taco Bell franchise brought a complaint in court about overtime pay under the FLSA. The employee’s contract contained a provision requiring submission of the complaint to binding arbitration. The franchise owner, Sundance, allowed the court case to continue for eight months before asking the court to stay the litigation and compel binding arbitration. The employee objected, arguing that Sundance waived its right to arbitrate by litigating in court for eight months.
The Court made clear that federal policy does not favor arbitration contracts over other types of contracts. Procedural rules favoring arbitration agreements are thus impermissible. One defense to enforcement of a contract is waiver, which is the intentional relinquishment of a known right. In cases involving agreements to arbitrate, nine of the thirteen federal circuit courts (including the Eighth Circuit) conditioned the finding of waiver on a showing of prejudice. The Eighth Circuit found that the employee had failed to show prejudice in the delay and sent the case to arbitration.
The Supreme Court granted review to resolve whether courts may adopt an arbitration specific waiver rule requiring a showing of prejudice. The Court ultimately disagreed with the nine circuits, and held that prejudice cannot be a condition of finding that a party waived is right to demand arbitration. The sole relevant inquiry was whether Sundance’s delay was sufficient evidence that it “knowingly relinquish[ed] the right to arbitrate by acting inconsistently with that right.” The Court exercised its right not to answer and sent the question back to the Eighth Circuit Court of Appeals. The Eighth Circuit has not rendered an opinion.
Moving forward, an employee claiming an employer waived its right to arbitrate does not have to show any prejudice. An employer’s unreasonable delay in demanding binding arbitration may, in and of itself, be sufficient proof of waiver. Employers should thus decide whether to enforce a contract requiring binding arbitration and inform the employee of a decision to arbitrate expeditiously in a dispute. This will lower the effectiveness of a waiver argument by an employee.