Kellogg Leads the Charge to Exploit Supreme Court Arbitration Victory

(Bloomberg) -- Former employees of Kellogg Co. are suing the company. Their claims? They allege the cereal giant shouldn’t have sued them earlier this year. And why did Kellogg go after its employees in the first place?

Well, for suing the company, of course.

This complicated conflict, slated for hearings before arbitrators in February, is emblematic of the new world faced by aggrieved U.S. employees under a recent U.S. Supreme Court precedent. But first, some background.

It all began last year, when a Kellogg employee in Nevada filed a lawsuit in federal court on behalf of co-workers who were allegedly denied overtime pay. Kellogg denied the allegations and successfully petitioned the judge to move the case to arbitration, citing an agreement the employee had signed requiring that disputes be handled there, rather than in court.

Such arbitration agreements, which usually give employees fewer rights than they would have in court, promote swift and efficient dispute resolution and dissuade litigious plaintiffs’ lawyers, industry groups say. Workers’ advocates argue that limited transparency, the inability to sue as a class and company-paid arbitrators leave employees with very little leverage.

Nevertheless, such agreements have proliferated in recent years, thanks to a series of U.S. Supreme Court rulings quashing attempts to curb them. In May, the high court’s Republican-appointed majority went further. In a 5-4 ruling, it held that arbitration agreements requiring workers to sign away their right to file a lawsuit as part of a class can be enforceable in workplace disputes.

Some months after that ruling, Battle Creek, Michigan-based Kellogg began filing breach of contract claims against ex-employees who had signed onto the overtime lawsuit, alleging they had violated their “continued employment” agreements. Under those agreements, Kellogg said, it delayed firing workers during a corporate restructuring in exchange for arbitration of any claims. In a court filing, Kellogg alleged that the original plaintiff “breached the contract by filing a claim arising out of his employment with Kellogg in court.” The company has asked arbitrators to make the ex-employees pay punitive damages and cover its legal costs.

“It was a shock—definitely did not see that coming,” said Kevin Johnson, one of the former employees who had signed up to join the overtime lawsuit. “I didn’t understand how they could do that.” 

In response, the workers’ attorneys have sued the company right back. They allege that Kellogg’s claims against its ex-employees are themselves illegal, because they constitute retaliation under the Fair Labor Standards Act.

Each of the company’s counterclaims “is baseless, lacks a reasonable basis in fact or law, and is brought in bad faith and with retaliatory motivation,” the plaintiff attorneys wrote in an August filing. Kellogg’s behavior, they said, “could dissuade a reasonable worker from making or supporting an FLSA claim.” Despite the new litigation, some workers have already withdrawn from the underlying lawsuit against Kellogg, according to a September joint filing by the parties.

The tactic being employed by Kellogg “guts the enforcement of the federal minimum wage and overtime laws,” the workers’ attorney Matt Dunn said in an interview. A Kellogg spokesperson declined to comment on the matter.

The Supreme Court victory for the forces of forced arbitration has intensified calls by labor and consumer advocates for states to pursue policies that could revive class actions. These include bills similar to California’s decade-old Private Attorneys General Act, which lets employees sidestep arbitration clauses by bringing claims on behalf of the government.

The majority of non-union private sector employers now force workers to sign mandatory arbitration agreements, according to the progressive Economic Policy Institute. EPI received a grant to study how forced arbitration “effectively suppresses worker rights.”

The money came from the W.K. Kellogg Foundation.

©2018 Bloomberg L.P.