The Ninth Circuit recently held in Morris v. Ernst & Young, LLP that employees have a substantive right to pursue work-related claims collectively, and employers may not force employees to waive this right as a condition of employment. As a result, class action waivers in arbitration agreements signed as a condition of employment are no longer enforceable in California.

Like many employers throughout the country, Ernst & Young required that all its employees sign arbitration agreements as a condition of employment, and each agreement required that the employees promise not to join with other employees in bringing legal claims against the company. Specifically, the agreements required that the employees pursue legal claims (1) exclusively through arbitration, and (2) only as individuals and in “separate proceedings.” As a result, employees could not initiate concerted legal claims against the company in any forum, whether court, arbitration proceedings or elsewhere.

Notwithstanding, employee Stephen Morris filed a class and collective action against Ernst & Young in federal court in New York, which Kelly McDaniel later joined. According to the complaint, Ernst & Young misclassified Morris and other similarly situated employees and therefore denied the employees overtime wages in violation of the Fair Labor Standards Act (FLSA) and California labor laws. The case was eventually transferred to the Northern District of California where Ernst & Young moved to compel arbitration pursuant to the agreements signed by Morris and McDaniel. The district court granted Ernst & Young’s motion and ordered individual arbitration, dismissing the case. However, Morris and McDaniel appealed to the Ninth Circuit.

On appeal, Morris and McDaniel argued that the class waivers contained in the employee arbitration agreements violated the National Labor Relations Act (NLRA). In support, the plaintiffs cited the National Labor Relations Board (NLRB or Board)’s decision in D.R. Horton, 357 NLRB No. 184 (2012), which had held that the right to pursue class claims is a substantive right that cannot be waived. Although the Fifth Circuit has repeatedly refused to enforce the NLRB’s decision on the grounds that the use of class action procedures is not a substantive right but a procedural device created by Rule 23 and that there is no explicit language in the NLRA to override the strong congressional policy favoring arbitration under the Federal Arbitration Act (FAA), and the Eighth Circuit and several other district courts have held likewise, not all courts have found the Fifth Circuit’s reasoning persuasive. For example, at least one California District court has recently rejected the Fifth Circuit’s reasoning, and in May, the Seventh Circuit held likewise.

On August 22, 2016, the Ninth Circuit joined the Seventh Circuit and held that employers cannot force employees to waive their substantive right to pursue class action remedies. According to the Ninth Circuit, “the right of employees to act together—is the essential, substantive right established by the NLRA,” and “Ernst & Young interfered with that right by requiring its employees to resolve all of their legal claims in “separate proceedings.” As a result, class action waivers in arbitration agreements violate the NLRA, and “the FAA does not mandate the[ir] enforcement.”

Although this decision is likely to be appealed to the Supreme Court (and in light of the circuit split, likely to receive review), this decision represents a significant blow to employers in the class action waiver battle. While the Supreme Court has typically been favorable to arbitration agreements, it is hardly a foregone conclusion, given the uncertainties surrounding the potential makeup of the Supreme Court following the next presidential election. Consequently, it is quite possible that this decision may ultimately be affirmed by the Supreme Court. At a minimum, California employers should review their arbitration agreements now to ensure current compliance.

For employers who choose to have their employees sign arbitration agreements as a condition of employment, they should ensure that the agreements do not require the employees to waive their substantive right to pursue class claims. However, employers should also ensure that they require such employees to pursue such claims in an appropriate forum. Ordinarily, arbitration provides significant difficulties for class action defense. As an alternative, employers may also choose not to require employees to sign arbitration agreements as a condition of employment. Notably, the Ninth Circuit did not extend its ruling to class waivers in agreements that employers have not required that employees sign as a condition of employment.