Ninth Circuit Finds That Requiring Employees to Sign Class Action Waivers Violates the NLRA

By Lonnie Williams, Sharon Ng and Carrie Francis

In a recent opinion, Morris v. Ernst & Young, the Ninth Circuit Court of Appeals followed the Seventh Circuit and held that employers violate the National Labor Relations Act (NLRA) when they require employees to sign an agreement that precludes employees from bringing a concerted legal claim regarding wages, hours and terms of conditions of employment.

This case marks another chapter in the ongoing D.R. Horton saga, which began in 2012 when the National Labor Relations Board (NLRB) decided in the D.R. Horton case that requiring employees to waive class and collective actions in an arbitration agreement violated the NLRA. Although the Fifth Circuit subsequently rejected the NLRB’s decision, and the Second and Eighth Circuits have followed suit, the NLRB continues to apply D.R. Horton against employers nationwide and will likely continue to do so absent Supreme Court review, due to its policy of “nonacquiescence” to unfavorable intermediate appellate opinions.

In Morris v. Ernst & Young, the plaintiffs were Ernst & Young employees who, as a condition of employment, were required to sign agreements prohibiting them from pursuing any claims against Ernst & Young outside of arbitration and requiring them to arbitrate only individually in separate proceedings. Morris initiated a class action against Ernst & Young, alleging the firm violated the Fair Labor Standards Act by misclassifying employees to deny overtime wages. Ernst & Young successfully moved the trial court to compel arbitration, and an appeal to the Ninth Circuit followed.

The Ninth Circuit opinion framed the issue as whether the Ernst & Young employment agreement’s requirement for “separate proceedings” interfered with a substantive federal right protected under section 7 of the NLRA. It concluded that the NLRA clearly protects employees’ rights to engage in concerted work-related legal claims, and therefore the employment agreement at issue violated the NLRA. Next, the Ninth Circuit panel followed the Seventh Circuit in rejecting the argument that the Federal Arbitration Act (FAA) conflicted with the NLRA. The panel determined that the FAA permits waivers of procedural rights, but because the NLRA created a substantive right, this right could not be waived in arbitration. Thus, the panel held that Ernst & Young could not require employees to waive their right to concerted work-related legal claims.

Employers should not rush to alter their existing arbitration agreements in response to this decision. It is likely that the Ninth Circuit will reconsider Morris or the U.S. Supreme Court will resolve this Circuit Court conflict in the next year or two. While in flux, employers may strategical chose not to enforce these waiver provisions within their arbitration agreements.

As for employers that are considering implementing arbitration agreements with class action waivers during this time of flux, they should consider including an opt-out provision. In a footnote, the Ninth Circuit suggested that class action waivers may be permissible when employees are not required to sign such waivers as a condition of employment or when they are given an opportunity to "opt-out" of the arbitration agreement. Employers should also consider including a provision stating that if the class action waiver is deemed unlawful that any class, collective, or group action will be resolved by a court and not by an arbitrator.

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