Employer's Right to Require Arbitration of Labor Disputes May Be Deemed Waived Due to Delay in Enforcement

On May 23, 2022, the U.S. Supreme Court clarified in Morgan v. Sundance that federal courts must not create legal standards that favor arbitration over litigation. The Court also rejected the test currently used by several federal circuit courts to determine whether a party has waived its right to arbitration.

In this case, the plaintiff, on behalf of herself and other employees, filed a lawsuit in federal district court against her employer, alleging failure to pay overtime wages. At the time of employment, the plaintiff and other employees had agreed to resolve all employment-related disputes through arbitration. Despite this arbitration clause, the employer did not seek to enforce it until eight months after the lawsuit began. The plaintiff objected, arguing that the employer had waived its right to enforce arbitration.

To determine whether the employer had waived arbitration, the district court applied a three-part test: (1) whether the employer knew of its right to demand arbitration, (2) whether the employer acted inconsistently with that right, and (3) whether the employer's inconsistent actions prejudiced the plaintiff. The district court ultimately ruled that the employer had waived arbitration. The federal circuit court applied the same test but reversed the district court's decision, finding that the plaintiff had not been prejudiced.

The U.S. Supreme Court rejected the third element of this three-part test, stating that it is not a standard factor in federal law for determining whether a party has waived a right but was instead created by courts under a presumption favoring arbitration. The Court further clarified that federal courts must not create legal standards that favor arbitration over litigation and that arbitration rights should be treated the same as other rights.

By removing the third element of the test, proving the waiver of arbitration rights in labor disputes will now be easier than before. Therefore, when weighing the pros and cons of litigation versus arbitration, employers should be aware that pursuing litigation in court instead of arbitration under the employment contract may result in the loss of the right to enforce the arbitration clause.