Due to the evolving circuit split, the enforceability of class waivers in employment arbitration agreements is ripe for U.S. Supreme Court review.

On August 22, 2016, the Ninth Circuit became the second federal appellate court to hold that mandatory employment arbitration agreements that prohibit all class proceedings violate the National Labor Relations Act (NLRA) and are unenforceable. See Morris v. Ernst & Young, LLP, No. 13-16599 (9th Cir. Aug. 22, 2016) (An employer “violates the [NLRA] by requiring employees to sign an agreement precluding them from bringing, in any forum, a concerted legal claim regarding wages, hours, and terms and conditions of employment.”). Morris comes on the heels of a May 2016 decision by the Seventh Circuit reaching the same conclusion. See Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016) (arbitration agreement that “required … employees to agree to bring any wage-and-hour claims … only through individual arbitration … violate[d] the [NLRA] … and is also unenforceable under the [FAA].”).

Case Summary

In Morris, Ernst & Young required employees to sign agreements containing a “concerted action waiver” that prohibited all class judicial and arbitration proceedings. The Ninth Circuit declined to enforce the agreement, reasoning that the waiver contravened the core substantive right established by Section 7 of the NLRA: the right to engage in concerted activity to address workplace grievances, through litigation or otherwise.

The NLRB reached the same conclusion in D.R. Horton, Inc., a determination that had been largely rebuked by federal courts until this year. See D.R. Horton, Inc., 357 NLRB 2277 (2012) (mandatory arbitration agreement that precludes employees from “filing joint, class, or collective claims” in any forum unlawfully restricts employees’ Section 7 right to engage in concerted action … notwithstanding the Federal Arbitration Act (FAA)[.]”).

Emerging Circuit Split

Despite the decision in Morris, the enforceability of employment class action waivers remains unresolved. Indeed, the Second, Fifth, Eighth and Eleventh circuits have explicitly or implicitly rejected the reasoning underlying Morris, Lewis and the NLRB’s D.R. Horton decision. See, e.g., Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013, 1018 (5th Cir. 2015) (employer “committed no unfair labor practice by requiring employees to relinquish their right to pursue class or collective claims in all forums by signing the arbitration agreements”); Walthour v. Chipio Windshield Repair, LLC, 745 F.3d 1326 (11th Cir. 2014) (citing D.R. Horton, Owen and Sutherland, concluding that arbitration agreements with collective action waivers are enforceable under FAA); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1055 (8th Cir. 2013) (rejecting D.R. Horton, concluding that “arbitration agreements containing class waivers are enforceable in claims brought under the FLSA.”); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013) (“[T]he [NLRB] … held that a waiver of the right to pursue an FLSA claim collectively in any forum violates the [NLRA]. … [W]e decline to follow the decision in D.R. Horton.”).

Due to the evolving circuit split, the enforceability of class waivers in employment arbitration agreements is ripe for U.S. Supreme Court review. Many of the Supreme Court decisions on which lower courts have relied in enforcing class action waivers have split 5-4. Consequently, the ultimate resolution of this issue may depend on who fills Justice Scalia’s vacancy on the Court.

What This Means for Employers

Employment arbitration agreements with class action waivers have become common in recent years, as employers seek to avoid crippling class actions. However, employers are likely to face increasing challenges to their enforcement in certain jurisdictions. This may be particularly true in California, where the California Supreme Court and Ninth Circuit have green-lit the use of the Private Attorneys General Act (PAGA) to circumvent the class waiver. See Sakkab v. Luxottica Retail N.A., Inc., 803 F.3d 425 (9th Cir. 2015).

Employers with operations in the Seventh and Ninth circuits (covering Alaska, Arizona, California, Hawaii, Idaho, Illinois, Indiana, Montana, Nevada, Oregon, Washington and Wisconsin) should review their existing arbitration agreements and revise as necessary to maximize the chances of enforcement.