Dear Workers: Actually, You’re Still Allowed to File Class-Action Lawsuits…Maybe

I’m seeing a lot of commentary along the following lines…

and…well, this isn’t quite right in a rather important way. Specifically, the statement should read “ workers may not band together to challenge violations of federal labor laws if they previously signed away their rights to do so.” Allow me to explain…

Jacob Lewis was a technical writer for a company called Epic Systems (not to be confused with Awesome Schemes I guess). When Jacob realized that he and his colleagues had been denied overtime pay, he decided to file a class-action lawsuit against the company on behalf of both himself and his colleagues. But there was a problem- when he was hired, Lewis had signed away his right to organize or participate in a class action of any kind via what’s known as an arbitration clause. (Arbitration clauses, as the name would suggest, generally require employees to use arbitration rather than court proceedings as the means to resolve disputes with their employers, but apparently they can do other things as well.) As a result, Lewis’ case became not only about the overtime pay itself, but also about the rights of employers to enforce contracts barring employee cooperation to demand it.

On its face, the issue seems simple- you signed away your right to do a thing, so you don’t get to do the thing. Given that the issue got all the way to the Supreme Court, however, there must be some other consideration in play…and after perusing SCOTUS blog (yes, that’s a thing) for a few minutes, I learned that of course there is:

One year after the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, the National Labor Relations Board advanced a novel interpretation of Section 7 of the National Labor Relations Act, which gives employees the right to organize, bargain collectively and “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The board held that Section 7 encompasses the right to bring a class or collective action. The board went on to say that an employment agreement that requires employees to resolve their disputes by arbitration on an individual basis is an unfair labor practice under Section 8 of the NLRA.

Put more simply, the representatives for Jacob and his colleagues argued that what they signed is unenforceable because it is in conflict with laws that define the rights of workers. And they lost.

The good news is that workers are still free to bring class-action lawsuits against their employers as long as they haven’t explicitly agreed not to. The bad news is that it’s often kind of hard not to agree to such a thing- most people don’t have the option to just not have a job, and this, well, unfortunate feature of existence can force them into signing away their rights if all of their potential employers require that they do so. But wait, there’s more good(ish) news- other than general lack of organization and competence, there’s not a whole lot stopping Congress from passing a law that makes arbitration clauses and other limits on worker lawsuits illegal.

You may have noticed from my bio (or, let’s be honest, my writing) that I’m an economist and not a legal scholar, in which case you’re probably not surprised that there’s an economic angle here that piqued my interest.

So here’s what’s happening right now, basically:

In this analogy, Office Space guy is Epic Systems. Epic Systems knows that it takes time, effort, and money to sue, so it can be pretty confident that it won’t get sued by individual employees if it rips off each employee just a little. (I guess it’s not a perfect analogy, since it’s not like the employees don’t notice, but the logic is still the same.) Collectively, however, it’s probably ripping employees off a lot, and it would likely be worth the employees’ while to band together and share the various costs of a lawsuit. This is essentially what class-action lawsuits do, so it’s not a big shock that companies would want to disallow them.

Okay this sounds bad, but, technically speaking, it’s not inefficient for, say, an employer to rip off employees to the tune of $1 million in order to make an additional $1.2 million in profit. (Yet another reason no one likes economists.) But it’s entirely possible that employers are both ripping off workers *and* destroying value…something along these lines, again in the spirit of Office Space:

Boss: Yeah, I’m going to need you to come in on Saturday, mkay? Your time is worth $20 per hour, and the work I’m going to have you do is only worth $10 per hour to me, but this is fine because I know I’m not going to pay you the $20 and it’s not going to be worth it for you to complain.

Employee: I hate everything.Where’s that printer when I need it…

I’m not a business genius, but I do know that if you’re taking $20 of resources to create something worth $10 you’re doing it wrong. This example provides not only a fairness justification but also efficiency grounds to outlaw limitations on class-action lawsuits- after all, its largely the threat of lawsuits that prevents employees from getting ripped off in inefficient ways. As such, this should be a no-brainer for Congress, BUT…individual employees have smaller incentives to lobby in support of such a law than employers have to lobby against it, and, hm, this is sounding familiar…

So familiar, in fact, that economists have a name for it- the collective action problem. The collective action problem refers to situations where a group would be better off if its members could cooperate to take collective action, but, absent such enforced (or, in this case, permitted) cooperation, people lack the incentives to act individually to reach the same outcome. (see also: voting) This issue really gets me riled up because I know the collective action problem is a thing, so I often feel the need to take one for the team and raise a stink, even though it’s not worth my time personally. At least I sleep well knowing that me being “that person” is for the greater good.

Until Congress takes action (not holding my breath), you may be wondering what you, as an individual citizen, can do to mitigate the collective action problem. Luckily, this is one of those cases where knowledge helps in and of itself- once you are aware of the problem, you’re better able to avoid unknowingly agreeing to situations that enable it. (yeah, I know, you can’t always always refuse the arbitration clauses, but you can at least make things awkward for a bit) And maybe, like me, you’ll even start feeling the need to be “that person” every once in a while.