​​Mandatory employment arbitration agreements suffered a significant blow last week, when the U.S. Court of Appeals for the Ninth Circuit (covering California, Washington, and other western states) found illegal and unenforceable a class and collective action waiver requiring employees to arbitrate their claims individually.

Lawsuit and Ninth Circuit Decision

In Morris v. Ernst & Young, an employee filed in federal court a class and collective action alleging Ernst & Young misclassified employees to avoid paying overtime. Another employee later joined the case. Both employees had signed agreements compelling them to pursue any claims against their employer in individual (and not class or collective) arbitration proceedings. The federal district court ordered the two employees’ claims to individual arbitration, and the employees appealed.

A three-member panel of the Ninth Circuit issued a split decision. The majority found the class and collective action waiver violated the National Labor Relations Act (“NLRA”). The NLRA applies to both unionized and private, non-unionized workforces and protects covered employees’ rights to engage in concerted activity for the purpose of mutual aid or protection. The majority concluded that pursuing class or collective legal action against an employer, whether in arbitration or any other forum, is protected concerted activity. Thus, the agreement’s requirement that employees pursue claims individually impermissibly interfered with their rights under the NLRA.

In her dissent, Ninth Circuit Judge Sandra Ikuta asserted that the class and collective action waiver is enforceable under U.S. Supreme Court precedent, and criticized the opinion as “breathtaking in its scope and in its error.” Ikuta argued the “language [of the NLRA] can be harmonized with enforcement of an arbitration agreement that waives class action mechanisms.” She also cautioned that the majority’s conclusion threatens to “cripple” employment arbitration as an approach to dispute resolution, as class procedural mechanisms interfere with arbitration and “eviscerate the principal benefits of arbitration—speed and informality, ‘mak[ing] the process slower, more costly, and more likely to generate procedural morass than final judgment.’”

What Morris Means for Employment Arbitration

The issue is now very unsettled, largely because of a split of authority. The Ninth Circuit is the fifth federal appellate court to address this issue, but only the second circuit to strike the provision. The other three circuits found such waivers enforceable and not a violation of the NLRA. The ongoing split among federal appellate courts increases the likelihood the issue will ultimately be reviewed by the U.S. Supreme Court. Further, it is possible that this decision could be reheard en banc (if requested) by an eleven-member panel of the Ninth Circuit, and a contrary decision issued. Whether en banc or U.S. Supreme Court review will occur (and, if so, when) remains to be seen. In the interim, class and collective active waivers are unenforceable in employment arbitration in federal courts in the Ninth Circuit. But to be clear, the Morris decision does not purport to strike down mandatory arbitration generally; the decision was focused on the class and collective action waivers within a larger agreement to arbitrate.

What Employers Should Do Now

In light of Morris, there are, principally, three options for employers currently using class and collective action waivers in their arbitration agreements: (1) leave the waivers in place and wait to see whether and how the appellate process plays out as described above; (2) strip out the waivers (and within this option, employers will need to consider whether to do so only on a prospective basis with new hires, or whether to clean up agreements with existing employees as well); or (3) leave the waivers in place, but install a severability clause that would give courts an additional basis to uphold the arbitration agreement generally even if the waiver is struck down (although there is no guarantee that a severability clause, by itself, would lead to this outcome).

The option selection process and level of risk tolerance will vary from employer to employer. For example, a large employer that anticipates litigation from current or former employees and wants assurances that the dispute(s) will be resolved through arbitration may need to be more proactive and conservative than an early stage company with only a handful of employees and no pending or threatened litigation in its midst. Employers should consult experienced employment counsel in making these types of assessments.​