In an important 2–1 decision, a divided panel of the Ninth Circuit Court of Appeals recently concluded class action waivers in arbitration agreements violate the National Labor Relations Act (NLRA) and therefore are unenforceable. This ruling adds to the growing circuit split on this critical issue, increases the likelihood that the Supreme Court of the United States will resolve the open question, and presents key strategic decisions for employers to make in the interim.

In Morris v. Ernst & Young (9th Cir., August 22, 2016), the waiver at issue required employees to proceed with their claims of unpaid overtime and misclassification “in separate proceedings” and therefore was construed as a class action waiver. Relying on a similar recent decision from the Seventh Circuit, Lewis v. Epic Systems, two members of the Ninth Circuit panel concluded the plain language of Section 7 of the NLRA, which provides that employees have the right “to engage in . . . concerted activities for . . . mutual aid or protection,” allows employees to file legal claims as a class. As discussed below, the short-term impact of Morris may be significant; however, employers should not overreact, as there is a significant chance that this ruling will be reheard by a full panel of the Ninth Circuit or reviewed by the Supreme Court. Furthermore, until the legal boundaries are clarified, employers are faced with several key strategy decisions discussed below.

Significantly, California state courts are not bound by the Ninth Circuit’s decision. Instead, California courts are bound by the Supreme Court of California’s decision in Iskanian v. CLS Transportation. Among other things, Iskanian held arbitration agreements can require employees to arbitrate their claims on individual bases, with the exception of claims under California’s Private Attorneys General Act of 2004. Further, Iskanian expressly rejected the argument that the NLRA prohibits class action waivers. Therefore, under this precedent from the California Supreme Court, California state courts cannot rely on the NLRA as a basis for refusing to enforce class action waivers. Because Iskanian is a state court decision while Morris is a federal court decision, employers that normally would seek to remove purported wage and hour class actions to federal court may want to reconsider this strategy if they have an arbitration agreement containing a class action waiver. Relatedly, employers can expect plaintiffs’ lawyers to file wage and hour class actions in federal court, such as by including a claim under the Fair Labor Standards Act in addition to those under state law.

The Ninth Circuit’s decision goes against the weight of authority on this important issue and is in direct conflict with other courts of appeals’ decisions, such as the Fifth Circuit’s decision in D.R. Horton, Inc. v. National Labor Relations Board. In D.R. Horton, a case defended by Ogletree Deakins, the Fifth Circuit rejected the National Labor Relations Board’s interpretation of Section 7 as precluding the enforcement of class action waivers. The vast majority of courts have agreed with the Fifth Circuit. Scores of similar cases are working their way through the court system, and the Supreme Court of the United States is very likely to agree to hear one of them in order to resolve the circuit split created by Lewis and Morris.

In footnote four of Morris, the Ninth Circuit panel strongly suggested that class action waivers nevertheless may be permissible when employees are not required to sign such waivers as a condition of employment (i.e., when they are given an opportunity to opt out of the agreement). Employers should strongly consider including such an opt-out provision in their arbitration agreements.

The Bottom Line

Those employers not already utilizing arbitration agreements may want to consider waiting until the legal dust settles before implementing them. Employers already using arbitration agreements with class action waivers may want to consider revising their form agreement in two important ways. First, consider adding an opt-out provision if the agreement doesn’t have one already. Second, include a provision stating that if the class action waiver is deemed unlawful for any reason, any class, collective, or group action will be heard in court and not by an arbitrator, as most practitioners agree that class arbitration is unwieldy and undesirable.

In sum, while the Ninth Circuit’s decision is significant, employers should not panic. There is a significant possibility that the full Ninth Circuit will reconsider Morris or the Supreme Court of the United States will settle the issue once and for all in the next year or two. In the interim, employers should ensure their arbitration agreements are updated in light of the nuances from the most recent rulings.