Arbitration in Employment Sea Change?: Ninth Circuit Holds Mandatory Class Action Waivers Unlawful

Can employers still require employees to sign arbitration agreements with class action waivers as a condition of employment?  Last week, the Ninth Circuit became the second appellate court to adopt the National Labor Relations Board’s (“NLRB”) position that class action waivers violate the National Labor Relations Act (“NLRA”) in Morris v. Ernst & Young LLP.

In February 2012, the plaintiffs filed a class action lawsuit against Ernst & Young in the Southern District of New York, alleging that the company misclassified employees, resulting in unpaid overtime in violation of the Fair Labor Standards Act.  As a condition of their employment, the plaintiffs were required to sign arbitration agreements requiring them to pursue legal claims exclusively through arbitration and only as individuals in separate proceedings.  The case was then transferred to the Northern District of California which granted Ernst & Young’s motion to compel arbitration and ordered the plaintiffs to pursue their claims in individual arbitration, pursuant to their arbitration agreements.  The employees appealed to the Ninth Circuit.

In a 2-1 ruling, the Ninth Circuit concluded that compulsory class action waivers violate sections 7 and 8 of the NLRA by limiting workers’ rights to act collectively.  The Ninth Circuit examined the statutory language of the NLRA and a prior NLRB opinion, concluding that an employer violates the NLRA when it requires employees covered by the Act to sign an agreement precluding them from “filing joint, class, or collective claims”.  Opinion at 6-7, citing D.R. Horton, 357 NLRB No. 184 (2012).  The Ninth Circuit reasoned that its holding did not contradict or undermine the Federal Arbitration Act (“FAA”).

Though the ruling prohibits compulsory waiver of class claims, not all is lost for employers in using arbitration agreements to defeat potential class actions.  Footnote 4 makes clear that agreements containing an “opt-out” clause for pursuing class claims do not violate the NLRA. (citing Johnmohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072, 1076 (9th Cir. 2014) (holding that arbitration agreement with class action waiver did not violate the NLRA because employees had the option to opt-out of the agreement).

The Ninth Circuit’s position on this issue has created a deeper split among the circuit courts with the Seventh and Ninth Circuits on one side of the issue, and the Fifth, Second, and Eighth Circuits on the other, making it far more likely this issue will ultimately be decided by the Supreme Court.