Why this Case is Important
Employers who implement arbitration agreements in the workplace must understand that there are certain limitations to enforcing such agreements when a governmental agency pursues an enforcement action on behalf of aggrieved workers, even if all workers signed an otherwise enforceable arbitration agreement and all causes of action would otherwise be compelled to arbitration if the employees filed suit on their own. In a recent case, the Ninth Circuit Court of Appeals in Walsh v. Arizona Logistics, Inc. DBA and Larry Browne, 9th U.S Circuit Court of Appeals, No. 20-15765 affirmed the U.S. Supreme Court's 2002 decision in EEOC v. Waffle House, Inc. 534 U.S. 279 (2002), by holding that the Secretary of Labor is not bound by a private arbitration agreement.
In Walsh, the Department of Labor (“DOL”) filed a enforcement action regarding alleged wage violations against Larry Browne and his companies Arizona Logistics, Inc. d/b/a Diligent Delivery Systems, and Parts Authority Arizona, L.L.C. In its enforcement action, the DOL alleged that Browne and his companies violated the Fair Labor Standards Act (“FLSA”) regarding a failure to pay minimum wage and overtime, record-keeping, and anti-retaliation provisions after classifying delivery drivers as independent contractors instead of employees. Browne responded by moving to compel arbitration as to the Secretary's enforcement action, citing the private arbitration agreements entered into between the delivery drivers and Browne's entities. The district court denied Browne's Motion to Compel Arbitration based on the Supreme Court’s Waffle House decision. Browne then appealed the district court’s decision to the Ninth Circuit Court of Appeals.
Generally, the Federal Arbitration Act (“FAA”) encourages parties to resolve their disputes via arbitration. The FAA states that, "arbitration agreements shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. §2. As in Waffle House, however, this case is distinct from the general parameters of the FAA because it includes more than just the private parties initially bound by the arbitration agreement. Neither the Secretary of Labor nor the DOL is a party to the arbitration agreement entered into between Browne's entities and the delivery drivers in question. In Waffle House, where the EEOC brought an enforcement action against Waffle House for firing an employee who had a seizure while at work, the court found that the EEOC was not a party to the arbitration agreement signed between the terminated employee and Waffle House, and was therefore not bound by it or required to engage in arbitration. Here, like the EEOC, the DOL was not a party to the private arbitration agreement signed by the other parties and therefore cannot be bound by it.
Browne also argued that the DOL should be distinguished from the EEOC and treated differently in this case; however, like the Supreme Court found in Waffle House regarding the EEOC, the DOL is the "master of its own case and is authorized to proceed in a judicial forum." Id. at 292. For this reason, the court was unconvinced.
Finally, Browne claimed that the DOL must arbitrate because the affected employees are the beneficiaries of the enforcement action and would receive injunctive relief as well as back pay. Browne relied on Chao v. A-One Med. Servs., Inc. 346 F.3d 908 (9th Cir. 2003), wherein the court refused to allow the DOL to recover overtime compensation for an employee when the employee had already pursued his individual right to such compensation. Here, however, there was no evidence that the delivery drivers sought compensation of their own accord.
More importantly, the court further explained in Chao that the DOL would not be barred from seeking an enforcement action if it "sought an injunction to vindicate broader governmental interests… not just to recover an employee's individual economic loss." Id. Like in Chao, the Walsh court ruled that the DOL is pursuing a broader public interest as well as relief for the individual delivery drivers which expands beyond the limited scope of the arbitration agreement. The DOL’s enforcement action may therefore properly serve to deter other companies from violating the FLSA and also protect complying employers from unfair wage competition.
Since the DOL has the independent authority to pursue an enforcement action and an obligation to protect the public and other law-abiding employers from these types of violations, the DOL cannot be compelled to arbitrate, even if an otherwise valid arbitration agreement is in place between the employer and the relevant employees as to all underlying causes of action. Employers are encouraged, therefore, to audit all pay practices and worker classifications on an annual basis to ensure compliance and deter both workers and governmental agencies from seeking judicial relief, even if employers have a valid arbitration agreement in place.
The employment team at Wood Smith Henning & Berman LLP stand at the ready to assist employers with an annual workforce analysis, ensuring wage and hour compliance, and crafting arbitration agreements that are maximally enforceable under the law.