Employers May Have a Strong Defense to Class Action Lawsuits Through the Use of Arbitration Agreements

Class action lawsuits under the Fair Credit Reporting Act have been a major source of liability for employers with nearly 4,000 federal cases filed in 2018 and over almost 2,000 filed as of mid-August, 2019.

In the past few years, we have seen staggering, multi-million dollar awards against a number of well-known companies.  The damages flow from the failure of these employers to strictly adhere to the technical requirements of the FCRA.

Plaintiff lawyers love the FCRA since the statute authorizes compensatory, statutory and punitive damages plus the award of attorney fees and expenses.  Technical violations are easy to prove and the class of affected individuals can become large for employers that perform significant amounts of hiring.

The burdens that these lawsuits place upon employers go well-beyond the significant monies paid to settle claims and judgments.  Class action lawsuits are extremely expensive to defend and can involve years of litigation and appeals.  Even when employers are successful, it is not uncommon for legal bills and costs to reach six figures.  Factor in the time spent by key personnel responding to discovery requests, attending depositions and meeting with counsel and you can see that these cases can be an expensive and time-consuming problem.

A recent trend has emerged where employers are successfully avoiding FCRA class action suits through the use of arbitration agreements which require that any claims arising from the background screening process be submitted to arbitration.  Carefully drafted arbitration agreements can allow an employer to avoid both the need to process claims through formal litigation and the substantial exposure of a class claim.

Arbitration is a process where the parties can agree to submit disputes to one or more neutral arbitrators who will make a binding decision on the dispute without the need for court intervention. The arbitration proceedings can avoid the costs and delays of a public court proceeding and will generally result in a more cost-effective, streamlined process that occurs outside of the public view.

In a recent case from California, an applicant for a position with the ride hailing service Lyft filed a class action claiming that Lyft had failed to provide him with the forms required under the FCRA when they denied his application due to his failing a criminal background check.  The court found that when the applicant had completed his on-line forms, he had agreed to Lyft’s terms of service which contained a provision requiring that all claims should be submitted to binding arbitration.  The court ordered that the FCRA dispute be submitted to binding arbitration and dismissed the case.

A similar result was reached in another recent case decided by the U.S. Supreme Court.  In that case, an employee filed a class action against his employer despite the fact that he had signed an arbitration agreement stating that all employment-related claims were subject to arbitration and that the employee waived the right to participate in any type of class action claim regarding his employment.  The court held that the employee was bound by this agreement and was required to submit his claim through the arbitration process on an individual basis.  He could only pursue his claim and was barred from filing or participating in a class action lawsuit.

The cases that have upheld arbitration agreements require that the contract must be clear and fair to both sides.  The language used must be specific and the terms of the arbitration must be fair.  Most notably, the contract should state that the matter will be handled by a neutral arbitrator selected under the rules of the American Arbitration Association or similar unbiased entity.  In any case, the arbitration provision should be drafted by an experienced employment attorney.

In another case decided earlier this year, a federal appellate court in Pennsylvania ruled that an arbitration agreement signed through a staffing agency could protect an employer who sought to hire a candidate through that agency.  In that case, Kelly Services was hired by Johnson & Johnson to place contingent workers at their facilities.  The plaintiff completed the Kelly Services forms that contained an arbitration agreement but did not mention Johnson & Johnson.  The court ruled that because the claims against Johnson & Johnson were “inextricably entwined” with the contract signed with Kelly Services, both parties could avail themselves of the protections of the arbitration clause.

This case is significant since many of our clients utilize contract employees procured through various staffing agencies.  Employers who utilize such services may want to inquire with their staffing agency as to whether the agency has an arbitration agreement in their candidate documentation.  However, the better practice is for employers to have these contractual provisions directly in place with their candidates.

The takeaway is that a well-drafted arbitration provisions that includes a waiver of FCRA claims can assist employers in reducing the risk of expensive class action claims.  The large number of these claims is expected to continue into the future so employers should avail themselves of any and all legal protections.

Kevin Prendergast is the President & General Counsel at Research Associates, Inc., a corporate investigative firm serving clients since 1953.  Kevin oversees the compliance program at RAI and works with clients and their counsel in developing legally compliant background screening programs.  Mr. Prendergast graduated from the Cleveland Marshall College of Law and has been licensed to practice law since 1987.  He is a member of the American Bar Association, Ohio State Bar Association and the Society for Human Resource Management.