Arbitration Agreements Waiving Class Actions Dealt Blow

Issue might soon head to Supreme Court

By Scott M. Wich Sep 21, 2016
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Agreements in which employees consent to have employment disputes submitted to an arbitrator, rather than a court, are not an uncommon condition of employment. The terms of such agreements can vary widely and, at times, include waivers of the right to pursue claims on a collective or class basis. While noting a divide among the nation's courts on the legitimacy of such waivers, the 9th U.S. Circuit Court of Appeals recently held that they are unenforceable under the National Labor Relations Act (NLRA).

Stephen Morris and Kelly McDaniel were employees of Ernst & Young. As a condition of their employment, they were required to sign a "concerted action waiver." The waiver required employees to pursue claims against the company through arbitration and also stipulated that workers must "arbitrate only as individuals and in 'separate proceedings.' " The effect of the waiver was to preclude class or collective actions.

Morris and McDaniel filed a class and collective action under the Fair Labor Standards Act and related state law, alleging employee misclassification and the denial of overtime pay. Ernst & Young moved to compel arbitration of the claims, which was ordered by the lower court. Morris and McDaniel appealed and argued that the waiver was unlawful under the NLRA. Ernst & Young countered that the Federal Arbitration Act (FAA) commanded that the arbitration agreements be enforced as written.

In a split decision, the appeals court sided with Morris and McDaniel. The majority opinion relied heavily on Section 7 of the NLRA, which protects the right of employees to engage in concerted activity. It cited several decisions where Section 7 protected activity was found to include the right to pursue in court legal actions on a collective or class basis.

Applying its Section 7 analysis to the Ernst & Young arbitration agreements, the majority opinion concluded that the requirement that employees pursue legal claims "only as individuals" and "in separate proceedings" interfered with their protected right to engage in concerted activity. The majority opinion concluded that the "separate proceedings" clause of the agreement was unenforceable.

The majority opinion found that the FAA was not inconsistent with the NLRA. It opined that the FAA, which favors the enforcement of arbitration agreements, could not be read so broadly as to allow for waivers of NLRA rights.

The dissenting opinion found the majority opinion to be "breathtaking in its scope and error." Relying on the interpretations of the FAA by the U.S. Supreme Court, the dissenting opinion said that the proper analysis questions whether a statute "contains an express 'contrary congressional command' that overrides the FAA.' " Finding that the text and legislative history of the NLRA does not expressly preclude pre-dispute arbitration agreements containing a class-action waiver, the dissenting opinion concluded that the Ernst & Young agreements should be enforced.

Morris v. Ernst & Young LLP, 9th Cir., No. 13-16599 (Aug. 22, 2016).

Professional Pointer: The underlying dispute, involving the interpretation of two federal statutes seemingly at odds with each other, is likely to reach the U.S. Supreme Court. With federal appeals courts split on the correct interpretation of the FAA and the NLRA, employers using arbitration agreements with their employees are well-advised to follow developments in this area of the law.

Scott M. Wich is an attorney with Clifton Budd & DeMaria, LLP in New York City.

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