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Court permits employer to use arbitration to blunt lawsuit for wage theft

Earlier this year, a federal appeals court in the Midwest issued a decision that allowed an employer to potentially escape liability for illegally depriving its employees of wages.  The case involved a chain of restaurants called Gusano’s Pizza that allegedly used an illegal tip pooling scheme to deprive employees of lawfully earned wages.

A group of former employees filed the case against Gusano’s as a “collective action” under the federal Fair Labor Standards Act (FLSA).  In a FLSA collective action, workers must express their desire to join the case as a plaintiff, which is sometimes called “opting in” to the case.  This “collective action” procedure differs from a traditional class action.  In a traditional class action courts presume that workers want to be part of the case unless the workers express their desire to “opt out.”  FLSA does not allow workers to bring a traditional “opt out” class action; they must use the “opt in” collective action procedure in order to band together in a case against the employer.

After the former employees filed their FLSA lawsuit against Gusano’s, the restaurant chain made its employees enter into an arbitration agreement that required the employees to bring FLSA claims in arbitration.  Unless a Gusano’s employee openly defied the wishes of his employer and refused to agree to this arbitration agreement, he could no longer opt in to the former employees’ collective action because the agreement required him to bring his wage theft claims in arbitration.

As we’ve previously reported, arbitration is a private justice system where arbitrators, instead of courts and juries, decide who should win lawsuits.  When an employer forces its employees to enter into these type arbitration agreements, like Gusano’s did, the resulting arbitrations usually give the employer unfair advantages.

In this case, Gusano’s effectively increased the costs its employees would have to pay if they wanted to pursue claims for wage theft against the restaurant chain.  The employees bound by the arbitration agreement could not benefit from the work of the lawyers who filed the FLSA collective action against Gusano’s.  Instead, if the employees wanted to pursue their claims, they would have to hire their own attorneys.  This added cost likely deterred employees from enforcing their rights—which was likely Gusano’s goal when it required employees to enter into an arbitration agreement.

Gusano’s tactic caught the attention of other lawyers who are now encouraging other companies to follow the same tactic so that they can avoid liability for wage theft.  This case is a further illustration for why this type of arbitration system is unfair and needs to be reformed.