The Supreme Court’s October 2018-2019 term began with the highly politicized confirmation of Justice Brett Kavanaugh. But despite some expectations that the new makeup of the Court would be more divided than the previous term, there were several unanimous employment law decisions this session. The Court will, however, address some more contentious issues next term.

The Supreme Court decided three employment arbitration-related cases, addressed whether small local government offices fall under the Age Discrimination in Employment Act (ADEA) and determined whether the filing of an administrative charge with the Equal Employment Opportunity Commission (EEOC) is a jurisdictional prerequisite to filing suit. In addition, the Court determined what is considered taxable compensation under the Railway Retirement Tax Act (RRTA), when federal law controls on off-shore drilling rigs, and when agencies can interpret their own ambiguous rules and regulations.

Next term, among other issues, the Court has agreed to consider a trio of cases to assess whether Title VII of the Civil Rights Act of 1964’s employment discrimination provision “on the basis of sex” includes discrimination based on an individual’s sexual orientation and gender identity. The following provides a brief overview of the significant employment cases decided this term and provides a preview of the issues on the Court’s 2019-2020 docket.

Decided Cases

Arbitration

New Prime Inc. v. Oliveira

On January 15, 2019, the Supreme Court ruled 8-0 that Section 1 of the Federal Arbitration Act (FAA) excludes from FAA coverage interstate truck drivers, even if they are independent contractors. The Court also held that a court, and not an arbitrator, must determine, at the outset, whether the Section 1 exclusion applies even when the agreement delegates questions of arbitrability to the arbitrator.

New Prime involved a truck driver who brought suit alleging wage and hour violations against a company for which he provided driving services.  The driver had signed an agreement with the company agreeing to resolve all work disputes via arbitration. The agreement delegated to the arbitrator questions about the agreement’s enforceability.  The company sought to compel arbitration, but the driver argued that because he was a transportation worker, the FAA Section 1 exemption, which provides that disputes concerning transportation workers engaged in interstate commerce are not covered under the FAA, should apply to his complaint. The parties agreed that the driver was a worker engaged in interstate commerce, but the company argued that because he was an independent contractor, and not an employee, the Section 1 exemption relating to “contracts of employment” did not apply. The Supreme Court disagreed, examining the legislative history of the FAA, and determining its drafters intended the statute to cover all relationships between employers and their workers, regardless whether the workers are classified as employees or independent contractors.

With respect to the arbitrability question, the Court held that a court, not an arbitrator, must determine whether FAA Section 1’s exclusion applies before mandating arbitration.¹

Henry Schein Inc. v. Archer and White Sales Inc.

In another unanimous decision, the Supreme Court on January 9, 2019, overturned the Fifth Circuit’s ruling that could allow a court to determine the arbitrability of a dispute under the FAA even though the parties expressly delegated that authority to the arbitrator. The distinction, according to the Fifth Circuit, was that in the case before it, the arbitrability claim was “wholly groundless,” and thus the arbitrator had no authority to rule otherwise. The Supreme Court reversed, holding that a “wholly groundless” exception was inconsistent with the FAA where, as in the case before it, the parties had delegated arbitrability disputes to the arbitrator. The Court concluded that an arbitrator, acting in conformity with the delegation clause, could decide whether the arbitrability claim was groundless or not, and because arbitration is a matter of contract, courts must enforce arbitration contracts according to their terms.²

Lamps Plus, Inc. v. Varela

In Lamps Plus, the Court on April 24, 2019 held that class arbitration is permissible only if the arbitration agreement expressly provides for such resolution. In this 5-4 decision, the Court held that if an arbitration agreement governed by the FAA is not clear as to the parties’ intent to submit to class arbitration, class arbitration is not permitted.

In this case, an employee adversely impacted by a data breach at his company sued on behalf of himself and a putative class.  The company moved to compel arbitration, which the court granted, but did so on a classwide basis.  The company appealed to the Ninth Circuit, which affirmed the classwide designation after applying California contract law principles, construing the agreement against the company as its drafter. The Supreme Court reversed, finding that the FAA preempts state contract laws that interfere with arbitration, that the FAA encourages individualized arbitrations, and that only if the parties agreed specifically to class arbitration would such be permitted; an agreement silent or ambiguous on the class issue  would not be enough to require a class arbitration.³

Discrimination and Equal Pay

Mount Lemmon Fire District v. Guido

The question presented in Mount Lemmon Fire District v. Guido was whether local government or agency bodies employing fewer than 20 workers could be considered “employers” under the ADEA. Only the Ninth Circuit had held that small local government offices were bound by the ADEA, whereas the Sixth, Seventh, Eighth, and Tenth Circuits had all held that state government offices of less than 20 employees did not qualify as employers for purposes of ADEA coverage. The Ninth Circuit found that the fire station was a “State agent or political subdivision of a State” under 29 U. S. C. § 630(b)(2) (the ADEA) and was liable for an age discrimination claim under the ADEA.

In the 8-0 opinion written by Justice Ginsberg (Justice Kavanaugh did not take part in the decision), the Supreme Court held that the phrasing of § 630(b) illustrated Congress’ intent to include all state offices as employers, regardless of the number of employees. The Court cited the 1972 amendments to Title VII and 1974 amendments to the Fair Labor Standards Act (FLSA) as support for its conclusion that state government offices, regardless of size, were intended to be considered “employers” under the ADEA as well.

Fort Bend County, Texas v. Davis

In another unanimous decision authored by Justice Ginsberg, the Supreme Court held that failing to file a charge of discrimination with the EEOC or equivalent state or local administrative agency is not a jurisdictional bar to a Title VII lawsuit. Rather, it is a non-jurisdictional, mandatory claim-processing rule that is a precondition for relief. As a result of this decision, employers must timely raise any defense of failure to exhaust administrative remedies or face the risk that such a defense will be waived.

The respondent in this case initially alleged sexual harassment and retaliation against her employer, but then attempted to supplement her charge by handwriting “religion” on the EEOC intake questionnaire, without amending the formal charge itself. After receiving a right-to-sue letter, she filed suit alleging religious discrimination and retaliation for reporting sexual harassment.

Her case cycled through the courts for five years before the county raised its defense that she had not exhausted her administrative remedies with respect to the religious discrimination claim, the one surviving cause of action at that time. Although the district court dismissed the lawsuit on this ground, the Fifth Circuit reversed, finding that the charge-filing requirement is not jurisdictional, but rather a prudential prerequisite to suit (i.e., failure to fulfill the requirement is an affirmative defense that should be pleaded), which the county waived by waiting too long to raise the defense. The Supreme Court affirmed.⁴

Yovino v. Rizo

The Supreme Court in Yovino v. Rizo vacated and remanded the Ninth Circuit’s decision on the basis that the appellate court released its opinion after the judge who wrote on behalf of the majority (Judge Reinhart) died.  

In Rizo, the Ninth Circuit had reinterpreted an important exception to the federal Equal Pay Act (EPA). By way of background, the EPA requires employers to provide equal pay between employees for equal work. The EPA delineates four defenses to this general rule. Pay disparities will be deemed lawful if they are made pursuant to: (1) a seniority system; (2) a merit system; (3) a system that measures earnings by quantity or quality of production; or (4) a differential based on any factor other than sex. The fourth defense is commonly referred to as the “catchall” exception. In Rizo, the defendant-employer alleged that the EPA’s catchall defense included consideration of an employee’s prior salary. The Ninth Circuit disagreed and held that prior salary – alone or in combination with other factors – could not justify a wage differential, because prior salary is not job-related and perpetuates the gender-based assumptions about the value of work that the EPA was designed to end. 

The Supreme Court did not comment on the underlying finding regarding the catchall exception to the EPA, but, citing relevant judicial precedent, determined that because Judge Reinhart was not an active judge when the decision was issued, he was “without power” to participate in the en banc court’s decision at the time it was rendered. On this basis only, the Supreme Court vacated Rizo and remanded the case back to the Ninth Circuit.⁵

Tax

BNSF Railway Company v. Loos

At issue in BNSF Railway Co. v. Loos was whether a railway employer’s payments for an employee’s lost wages after an on-the-job injury should be taxable compensation under the Railway Retirement Tax Act. The respondent had sued the railway under the Federal Employers’ Liability Act and was awarded damages. A portion of those damages were allocated as lost wages due to the injury. The employer argued that the lost wages portion of the judgment was taxable compensation under the RRTA and asked that taxes be withheld to cover the employee’s share of RRTA taxes. The employee, however, claimed such payments were not for “active services” and, therefore, should not be considered taxable compensation.  

In a 7-2 opinion, the Supreme Court agreed with the employer’s argument and found that lost wages should be considered “active services” under the RRTA and that the employer should withhold taxes from lost wages earnings. The Court compared the lost wages payment to payouts under the Federal Insurance Claims Administration and determinations by the Internal Revenue Service that wages do not necessarily need to be paid for active services, as previous cases had held both severance pay and back pay to be taxable wages.⁶ The Court qualified this finding only with the comment that payments for active service or for periods of absence from service may be considered taxable compensation under the RRTA, as long as they stem from the employer-employee relationship.⁷

Agency Deference

Kisor v. Wilkie

In Kisor v. Wilkie, the Court considered whether and when courts should grant a federal agency deference to interpret its own ambiguous rules and regulations. The case addressed whether the Veterans Administration appropriately interpreted its regulations when ruling that the petitioner, a Vietnam veteran, was not entitled to post-traumatic stress disorder (PTSD) treatment benefits related to his earlier 1982 request for PTSD benefits. After being denied benefits on his first request, Kisor reopened his claim in 2006, offering supplemental records. The VA concluded that the supplemental records describing Kisor’s trauma were not “relevant” to his request for reconsideration of benefits because, while they supported his trauma claim, they did not counter the earlier conclusion that he did not have PTSD at that time. As a result, on reconsideration, the VA granted him benefits beginning with the date of his motion to reopen—but not from his original application. The Board of Veterans’ Appeals, and then the Court of Appeals for Veterans Claims, affirmed that outcome. The U.S. Court of Appeals for the Federal Circuit also affirmed, relying on the deference afforded to the agency’s right to interpret its own regulations, known as Auer deference.⁸

The Supreme Court upheld Auer deference. The Court’s opinion explained that agency deference as to ambiguous regulations is “rooted in a presumption about congressional intent—a presumption that Congress would generally want the agency to play the primary role in resolving regulatory ambiguities.” The opinion stressed that such deference “serves to ensure consistency in federal regulatory law,” enabling stakeholders to plan their means of complying with laws and regulations.

With those principles in mind, and emphasizing the importance of stare decisis, the Court retained the Auer deference and attempted to clarify its scope. The Court reiterated that deference cannot come into play unless the agency regulation is truly ambiguous and the agency’s interpretation is reasonable. It offered criteria for courts to consider when making these determinations. For example, the Court noted that, to be entitled to deference, an agency’s interpretation must be the official position of the agency (rather than an ad-hoc finding) and must implicate the agency’s substantive expertise. Ultimately, the Court vacated the appellate court’s holding and remanded the case, instructing the Federal Circuit to further examine whether the VA’s regulation is truly ambiguous and to reassess whether Auer deference should apply under the circumstances.

Notably, while all justices concurred in the judgment, several of the more conservative jurists (led by Justice Gorsuch) criticized the Court’s refusal to abandon Auer.⁹

Wage and Hour

Parker Drilling Management Services, Ltd. v. Newton

In Parker Drilling Management Services, Ltd. v. Newton, the Court held that the Fair Labor Standards Act, and not state law, applies to drilling platforms located in open waters governed by the Outer Continental Shelf Lands Act (OCSLA). The Court determined that, because the FLSA addresses both standby and minimum wage claims raised by workers, California law cannot be adopted as a surrogate federal law on the Outer Continental Shelf (OCS).

The respondent in this case worked 14-day/12-hour shifts on a drilling platform on the OCS off the California coast. The drilling company complied with federal laws on standby time, but allegedly did not comply with California’s minimum wage and standby laws. The Ninth Circuit ruled that California law applied rather than federal law, which would have increased the pay due to workers. The Supreme Court disagreed in a unanimous opinion, holding that the OCS is a federal enclave and so federal law applies. Further, the Court reasoned that the OCSLA applied only when there was no other federal law on point. In other words, the Court concluded that OCSLA permits state law to serve as a gap-filler for the OCS, but that federal law applied in this case because it appropriately addressed the issue.¹⁰

Preview of 2019-2020: Sex Discrimination and Fiduciary Duty on the Docket

The Supreme Court granted certiorari for the October 2019 term in several cases with important employment law implications. Three cases—Altitude Express, Inc. v. Zarda, Bostock v. Clayton County, Georgia, and R.G. & G.R. Harris Funeral Homes v. Equal Employment Opportunity Commission—will address whether Title VII’s prohibitions against sex discrimination expressly protect individuals on the basis of sexual orientation and/or gender identity. The first two address sexual orientation, and the third gender identity.¹¹

These cases will set the stage for the Court to consider several hotly contested legal arguments about whether sexual orientation and gender norms are included within the term “on the basis of sex” in the Civil Rights Act. The circuits are split on the issue.

The Court also will hear Retirement Plans Committee of IBM v. Jander, which will address the proper pleading standard required to allege breach of fiduciary duty regarding plan fund management under the Employment Retirement Income Security Act (ERISA). The Court will address an apparent circuit split in the interpretation of Fifth Third Bancorp v. Dudenhoeffer, wherein the Second Circuit disagreed with the Fifth and Sixth Circuits about the standard for bringing a breach of fiduciary duty claim for a company stock purchasing plan. The pleading standard at issue applies when employees bring a claim that a fiduciary breached his or her duty by failing to divest company stock from the employee stock ownership plan (ESOP) when the ESOP manager knew of an increased risk in the stock or that company stock prices may be artificially high.

Conclusion

While the 2018-2019 Supreme Court term moved several employment law issues forward and clarified a few points of debate, the Court denied review of many of the more contentious cases. As we learn more about Justice Kavanaugh as a member of the Court and the opinions he writes in relation to more senior Justices, the Court’s compass will become clearer. The next term, and especially the implications of the extent of Title VII protections for employees, will be particularly influential.