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Arbitration Provisions In Employment Contracts: Invoke Now Or Forever Lose Your Rights

On May 23, 2022, the United States Supreme Court, in a unanimous decision, held that an employer that fails to timely invoke its right to arbitration of disputes under an employment agreement risks waiving its arbitration rights.

In Morgan v. Sundance, Inc., the Court decided that a finding of a waiver of rights under the Federal Arbitration Act (the “FAA”) should not be based on prejudice to, or detrimental reliance by, the party opposing arbitration. In so holding, the Court found that the prejudice requirement, previously followed by nine circuit courts, was inconsistent with federal waiver law.


Petitioner Robyn Morgan worked as an hourly employee at Taco Bell. Upon hire, she signed an agreement to “use confidential binding arbitration, instead of going to court,” to resolve any workplace disputes. Despite that agreement, Morgan thereafter brought suit in the U.S. District Court for the Northern District of Iowa against a Taco Bell franchisee, Sundance Inc., for violations under the Fair Labor Standards Act (the “FLSA”). Specifically, Morgan alleged that Sundance had unlawfully avoided the FLSA’s overtime requirements “by recording hours in one week as instead worked in another to prevent any week’s total from exceeding 40.”

The Court noted that “Sundance initially defended itself as if no arbitration agreement existed.” Sundance filed a motion to dismiss, which was denied by the district court, and then answered Morgan’s complaint, asserting fourteen affirmative defenses. Notably, Sundance did not raise as an affirmative defense the arbitration provision contained in Morgan’s employment agreement. Sundance and Morgan then mediated the dispute, without success.

Finally, nearly eight months after Morgan had commenced suit, Sundance filed a motion to stay the litigation pending arbitration under the FAA. Morgan opposed the motion, arguing that Sundance had waived its right to arbitration.

The court applied a test adopted by the Eighth Circuit to decide the waiver issue. Under that standard, a party will be deemed to have waived its contractual right to arbitration where it (i) knew of its arbitration right, (ii) acted inconsistently with that right, and,(iii) most notably, prejudiced the other party by its inconsistent actions. Applying this test, the district court concluded that Morgan had been prejudiced by Sundance’s conduct and, accordingly, denied the motion to compel arbitration.

The Eighth Circuit, however, reversed, and directed the parties to arbitrate the dispute. The court noted that formal discovery had not yet begun, nor had the parties contested any matters going to the merits of the case. Accordingly, the Eighth Circuit found that Morgan had not been prejudiced by Sundance’s delay in seeking arbitration. Morgan then sought and obtained certiorari review by the Supreme Court.

Supreme Court’s Rejection Of The “Prejudice” Requirement

On review, the Supreme Court reversed the Eighth Circuit and concluded that Sundance had waived its right to arbitrate Morgan’s claims.

The Court first acknowledged that outside the arbitration context, courts assessing waiver generally do not inquire about prejudice. Rather, the court “focuses on the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party.” Thus, the Supreme Court found that the Eighth Circuit had applied a rule found nowhere else outside the arbitration context.

The Court traced the Eighth Circuit’s reasoning to a “decades old” Second Circuit decision, Carcich v. Rederi A/B Nordie, 389 F.2d 692 (2d Cir. 1968), in which the court referred to “an overriding federal policy favoring arbitration” under which a waiver of that right “is not to be lightly inferred.” The Supreme Court found that over the ensuing years “both that rule and its reasoning spread.” Indeed, nearly every circuit court presented with this issue had followed suit, with only two exceptions – the Seventh Circuit and the D.C. Circuit.

The Supreme Court rejected this rationale, holding that while the FAA embodies a general “policy favoring arbitration,” that policy nonetheless “does not authorize federal courts to invent special, arbitration procedural rules.” The Court reasoned that “a court must hold a party to its arbitration contract just as the court would to any other kind. But a court may not devise novel rules to favor arbitration over litigation. The federal policy is about treating arbitration contracts like any others, not about fostering arbitration.”

The Supreme Court remanded the case to the district court for reassessment of the waiver issue. With the “prejudice” requirement stripped away, the Court noted, the appropriate legal standard would “focus on Sundance’s conduct. Did Sundance, as the rest of the Eighth Circuit’s test asks, knowingly relinquish a right to arbitrate by acting inconsistently with that right?”

Impact On Employers

In the wake of the Morgan decision, employers faced with court claims by employees who have signed arbitration agreements should invoke their arbitration rights at the earliest opportunity. An employer that neglects to do so may be found to have waived its right to arbitrate the dispute, regardless of whether the employee can show prejudice resulting from the delay.

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If you have questions regarding the Morgan decision or arbitration provisions in employment agreements generally, please feel free to contact one of our experienced employment lawyers.