Fifth Circuit Orders FLSA Dispute to Arbitration Based on Delegation Clause in Employer’s Arbitration Policy

The nation’s Fifth Circuit Court of Appeals has ruled that a delegation clause stating gateway determinations regarding arbitrability must be decided by an arbitrator applied to an oil worker’s preexisting Fair Labor Standards Act (“FLSA”) claim.  In Kubala. v. Supreme Production Services, Inc., No. 15-41507 (5th Cir., July 20, 2016), a Texas oil field employee, Kubala, brought a proposed FLSA case against his employer, Supreme Production Services (“SPS”).  Before Kubala’s employer learned of the proposed collective action case, however, SPS instituted an arbitration policy requiring workers to arbitrate all employment-related disputes with the company.

The arbitration policy stated each worker’s continued at-will employment was conditioned on acceptance of the policy.  In addition, the policy included a delegation clause that stated it was up to an arbitrator, not a judge, to determine whether an SPS employee’s claim was subject to arbitration.

After learning of the lawsuit, SPS filed a motion to dismiss the case or compel the dispute to arbitration.  Although Kubala continued his employment after the policy was instituted, the oil worker claimed the arbitration policy did not apply to his preexisting FLSA claim.  The district court denied the company’s motion and SPS filed an appeal with the Fifth Circuit Court of Appeals.

On appeal, the court stated:

The district court erroneously held that there is no arbitration agreement. The court appears to have thought that the question at the first step of the analysis is whether there is an agreement to arbitrate the claim currently before the court. But as we have explained, the only issue at the first step is whether there is any agreement to arbitrate any set of claims. Determining whether that agreement covers the claim at bar is the second step. Thus, the district court erred by engaging in close contract interpretation at the first step, which focuses only on contract formation. The proper course is to examine only the formation issue, and it is obvious that these parties validly formed an agreement to arbitrate some set of claims.

Whether they entered a valid arbitration contract turns on state contract law. Carey, 669 F.3d at 205. They agree that Texas contract law governs. Arbitration agreements between employers and their employees are broadly enforceable in Texas. In re Poly-Am., L.P., 262 S.W.3d 337, 348 (Tex. 2008). Kubala was not initially subject to an arbitration agreement; instead, it was imposed while he was already employed on an at-will basis. Therefore, the question is whether the arbitration agreement was a valid modification of the terms of his employment. To demonstrate a modification of the terms of at-will employment, the proponent of the modification must demonstrate that the other party (1) received notice of the change and (2) accepted the change. In re Halliburton Co., 80 S.W.3d 566, 568 (Tex. 2002). But acceptance need not be anything more complicated than continuing to show up for the job and accept wages in return for work. “[W]hen the employer notifies an employee of changes in employment terms, the employee must accept the new terms or quit. If the employee continues working with knowledge of the changes, he has accepted the changes as a matter of law.” Hathaway v. Gen. Mills, Inc., 711S.W.2d 227, 229 (Tex. 1986) (cited in Halliburton, 80 S.W.3d at 568).

The appellate court next stated SPS successfully demonstrated that Kubala received notice of and accepted the change in employment terms before examining the delegation clause. The Fifth Circuit said the delegation clause included in SPS’s arbitration policy was “strikingly similar to the clause in Rent-A-Center.”  According to the appellate court:

These clauses are almost identical. It inevitably follows that the clause in this case is a valid and enforceable delegation clause. Just as in Rent-A-Center, see id. at 68–69, the parties agreed that the arbitrator and not the court should be the decision maker on whether a given claim is arbitrable.

Since a valid and enforceable delegation clause existed, the Fifth Circuit Court of Appeals reversed the district court’s order and remanded the case with instructions to compel the dispute to arbitration.

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