Ninth Circuit Holds Class Action Waivers Illegal Under the NLRA

On August 22, 2016, in Morris v. Ernst & Young, LLP, the Ninth Circuit Court of Appeals joined the Seventh Circuit Court of Appeals in holding that class action waiver provisions in arbitration agreements governing employment disputes are illegal under the National Labor Relations Act (NLRA or the Act) because these waivers interfere with the right of employees to engage in concerted activity protected by Section 7 of the Act (Section 7). The holdings of these courts are in indirect conflict with an opinion of the Fifth Circuit Court of Appeals, which upheld the validity of such waivers in the face of a challenge under Section 7. Employers in jurisdictions whose courts have not yet decided this issue, and who employ such waivers in their arbitration agreements or otherwise, should be prepared for attacks on their arbitration agreements by employees seeking to bring class or collective actions or by the National Labor Relations Board (NLRB).

Ernst & Young (E&Y) required its employees to sign agreements that they would (1) not join with other employees in bringing legal claims against the company and (2) pursue any claims against the company only through arbitration. Although former employee Stephen Morris had signed such a “waiver” agreement, he filed a complaint against E&Y under the Fair Labor Standards Act (FLSA) and the California labor laws in federal district court alleging the company had misclassified him as an “exempt” employee and had improperly failed to pay him overtime. Morris brought the Complaint as a class and collective action on behalf of similarly situated employees. Another former employee, Kelly McDaniel, who had also signed a waiver agreement, later joined the action. Based on the signed waiver/arbitration agreements, the district court dismissed the case and ordered individual arbitrations. The court rejected plaintiffs’ argument that the “waiver” agreements violated the National Labor Relations Act (NLRA), the Norris LaGuardia Act, and the FLSA.

The Ninth Circuit’s Decision
On appeal, the Ninth Circuit focused on the legality of the waiver agreements in light of the “concerted activities” language found in Section 7 of the NLRA. Section 7 provides: “Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The Ninth Circuit concluded that class or collective actions constitute “concerted activities for the purpose of . . . mutual aid or protection” within the scope of Section 7 and, thus, held that E&Y’s waiver agreements constituted unlawful interference with Section 7 rights in violation of Section 8 of the Act. In this regard, the Court noted that the NLRB had reached the same conclusion in its decision in the D. R. Horton, Inc. matter, issued in 2012, as had the Seventh Circuit Court of Appeals in Lewis v. Epic Sys. Corp., decided in May of this year.

The critical aspect of the Ninth Circuit’s analysis concerned the impact of the Federal Arbitration Act (FAA) on the portion of E&Y’s waiver agreements that required separate proceedings, i.e., that prohibited class or collective actions. Although noting that agreements to arbitrate employment disputes do not conflict with the NLRA and that federal policy favors arbitration, the Court cited to the FAA’s “savings” clause, which provides that arbitration agreements are enforceable “save as such grounds that exist . . . for the revocation of any contract.” The Court reasoned that because the part of E&Y’s waiver agreement that required separate proceedings would violate the NLRA if it appeared in an agreement to litigate disputes in court, that part of the agreement is not rescued from illegality because it is included in an arbitration agreement. In this regard, the Court distinguished a number of Supreme Court decisions upholding arbitration agreements that required the parties to forego procedural rights, because in the present case the waiver agreements at issue required E&Y employees to forgo their substantive right to engage in concerted activity.

It should be noted, however, that the Ninth Circuit did not invalidate the portion of the waiver agreement requiring E&Y’s employees to arbitrate their FLSA claims. The Court remanded the case to the district court to determine whether that portion of the agreement could be salvaged from the illegal portion of the agreement prohibiting employees from joining together in a single proceeding.

The Uncertain State of the Law
The Ninth Circuit’s opinion in Morris and the Seventh Circuit’s opinion in Lewis, noted above, are in direct conflict with the decision of the Fifth Circuit Court of Appeals in D. R. Horton, Inc. v. N.L.R.B. In that case, the Fifth Circuit concluded that class and collective actions are only procedural mechanisms, not substantive rights protected by Section 7. In Sutherland v. Ernst & Young LLP, the Second Circuit Court of Appeals upheld the identical class action waiver at issue in Morris, but the plaintiffs in Sutherland failed to make the Section 7 argument accepted by the Morris and Lewis courts. In Quilloin v. Tenet HealthSystem Phila., Inc., the Third Circuit Court of Appeals upheld a class action waiver in the context of an FLSA claim, where the plaintiff argued that the waiver violated Pennsylvania law, but, again, the plaintiff did not make a Section 7 argument.

When, and if, the Second and Third Circuits, as well as other courts, are asked to decide whether class action waivers are illegal under Section 7, it is anybody’s guess how these courts will decide the issue. It appears that the divergence in the Circuit Courts is setting up an opportunity for the Supreme Court to ultimately decide the issue. In the meantime, it seems clear that the Board, armed with the Morris and Lewis decisions, will continue to come after employers whose arbitration agreements contain class action waivers.

For questions about this blog, or arbitration issues generally, please feel free to contact an attorney in the Gibbons Employment & Labor Law Department.

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