Court Denies Arbitration in Unpaid Overtime Case

Employers sometimes make their employees sign arbitration agreements in an effort to discourage claims for unpaid overtime.  A federal court in Houston, Texas recently denied a defendant’s attempt to compel arbitration in an unpaid overtime case brought under the Fair Labors Standards Act, of FLSA.  The case, styled Magdaleno v. PCM Construction, involves a collection action claim for unpaid overtime filed by a driver against a company that removes construction debris.  The defendants had filed a motion to compel arbitration, arguing that the plaintiff and other, similarly situated workers had signed agreements which required arbitration for all employment-related disputes.  The alleged arbitration provision provided as follows:

EMPLOYEE AGREES TO SUBMIT ANY DISPUTE BETWEEN EMPLOYEE AND THE COMPANY, OR ANY OF THE COMPANY’S EMPLOYEES, REPRESENTATIVES OR AGENTS, TO MANDATORY, BINDING ARBITRATION. This provision applies to all claims brought by Employee except for those related to any action pending against Company on November 1, 2011. The arbitration will be held exclusively pursuant to the provisions of the Federal Arbitration Act (“FAA”). For Employees who work primarily in Texas, the arbitration shall be in Bexar County, Texas; for all other Employees, the arbitration shall be conducted in Raleigh, North Carolina. The arbitration shall be presided over by a single arbitrator under the Employment rules of the American Arbitration Association applicable to such dispute[](s) then in effect. Each party to the arbitration shall equally bear the expenses of the arbitration, and the decision of the arbitrator as to any matter submitted to arbitration shall be final, conclusive, binding upon and enforceable by all parties to the arbitration. The duty to arbitrate disputes shall survive the termination of Employee’s employment with the Company and this Agreement. Any claim subject to arbitration must be brought in the claimant’s individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding. The parties agree that the arbitrator may not consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class proceeding.

After addressing procedural issues related to the defendants’ motion, the Court next addressed the validity of the arbitration provision.  The Court stated, “Like any contract, an arbitration agreement must be supported by consideration. Continued employment pursuant to an at-will relationship is not sufficient consideration for the formation of an arbitration agreement. An illusory promise also is not consideration and will not support the formation of a contract.”  (citations omitted).

The Court found that, since the agreement was not mutually binding (only employees were obligated to arbitrate their disputes), and since the agreement expressly provided that employment was at-will, and because PCM could modify or terminate the arbitration agreement at any time at its own discretion, the agreement was nothing more than an illusory promise that failed for lack of consideration.  The Court also found that because the defendants actively participated in the unpaid overtime lawsuit and waited until two weeks before the close of discovery to move to compel arbitration, they had waived their right to arbitrate.  The District Court subsequently adopted the Magistrate’s ruling on May 1, 2014.

Arbitration provisions are increasingly being used by employers in an effort to shield themselves from unpaid overtime claims, particularly collective actions.  However, as this case illustrates, arbitration provisions are not as foolproof as they may first appear, and unpaid overtime claimants may be able to defeat them if they are not carefully drafted.

Josh Borsellino represents workers to get them the unpaid overtime they deserve.  If you have questions about whether you may be owed unpaid overtime, complete this online form or call 817-908-9861 or 432-242-7118 for a free consultation.