Why it matters

Siding with the National Labor Relations Board (NLRB), the Ninth Circuit Court of Appeals pushed the question of whether it violates the National Labor Relations Act (NLRA) to require employees to sign agreements precluding them from bringing concerted legal claims in any forum one step closer to the U.S. Supreme Court. In D.R. Horton and subsequent cases, the NLRB took the position that employers run afoul of the NLRA by eliminating workers' ability to band together to bring legal action. However, the federal appellate courts have split on the issue. The Second, Fifth, and Eighth Circuits disagreed with the Board while the Seventh Circuit sided with the NLRB earlier this year. Now the Ninth Circuit has broadened the split by joining with the Seventh Circuit in a case involving an employee at an accounting firm required to sign a concerted action waiver. The district court enforced the waiver but the federal appellate panel reversed, finding that Congress's intent in Section 7 of the NLRA was clear. "This case turns on a well-established principle: employees have the right to pursue work-related legal claims together," the court wrote. "Concerted activity—the right of employees to act together—is the essential substantive right established by the NLRA." A dissenting judge said the majority's opinion was "breathtaking in its scope and in its error," as well as "directly contrary to Supreme Court precedent." The Supreme Court will be forced to decide the issue sooner or later and with the deepening split, the real question is when the Justices will hear it.

Detailed discussion

As a condition of his employment at accounting firm Ernst & Young, Stephen Morris was required to sign an agreement not to join with other employees in bringing legal claims against the company. The concerted action waiver required employees to pursue legal claims against Ernst & Young exclusively through arbitration and arbitrate only as individuals and in "separate proceedings."

Disregarding the agreement, Morris filed a class and collective action against Ernst & Young in New York federal court, alleging violations of California state law as well as the Fair Labor Standards Act. The case was later transferred to California federal court and joined with a similar action filed by Kelly McDaniel.

The employer moved to enforce the agreement and a district court ordered individual arbitration, dismissing the suits. Morris and McDaniel appealed to the Ninth Circuit Court of Appeals, arguing that the agreements violated the National Labor Relations Act (NLRA) and could not be enforced. For support, they cited the National Labor Relations Board's (NLRB) line of cases beginning with D.R. Horton, where the Board held that concerted action waivers violate the NLRA.

The majority of a Ninth Circuit panel agreed.

Defining the scope of NLRA rights is a task assigned to the NLRB, the court said, attaching considerable deference to its interpretation of the statute and reviewing the Board's position to see whether Congress has spoken to the precise question at issue.

The NLRB made clear in D.R. Horton that "employees must be able to initiate a work-related legal claim together in some forum, whether in court, in arbitration, or somewhere else," Circuit Chief Judge Sidney R. Thomas wrote, finding that this decision accorded with the legislature's position. "The intent of Congress is clear from the statute and is consistent with the Board's interpretation."

"Section 7 protects a range of concerted employee activity, including the right to 'seek to improve working conditions through resort to administrative and judicial forums,' " the majority said. "Concerted action is the basic tenet of federal labor policy, and has formed the core of every significant federal labor statute leading up to the NLRA."

Preventing the exercise of a Section 7 right "strikes us as 'interference' within the meaning of Section 8," the court added. "Thus, the Board's determination that a concerted action waiver violates Section 8 is no surprise. And an employer violates Section 8 a second time by conditioning employment on signing a concerted action waiver."

Applying these principles to the Ernst & Young agreement, the court said the "separate proceedings" clause is the "very antithesis" of Section 7's substantive right to pursue concerted work-related legal claims. "The 'separate proceedings' clause prevents concerted activity by employees in arbitration proceedings, and the requirement that employees only use arbitration prevents the initiation of concerted legal action anywhere else," the majority wrote. "The result: interference with a protected Section 7 right in violation of Section 8. Thus, the 'separate proceedings' terms in the Ernst & Young contracts cannot be enforced."

The Federal Arbitration Act (FAA) did not dictate a contrary result, the court said, because the NLRA obstacle is a ban on concerted legal claims—not a ban on arbitration. "It would equally violate the NLRA for Ernst & Young to require its employees to sign a contract requiring the resolution of all work-related disputes in court and in 'separate proceedings,' " the Ninth Circuit said. "The problem with the contract at issue is not that it requires arbitration; it is that the contract term defeats a substantive federal right to pursue concerted work-related legal claims."

Crucial to this result was the court's distinction that the right to concerted activity is a substantive right established by the NLRA, not a procedural one, meaning it cannot be waived. This distinction allowed the court to distinguish case law enforcing arbitration agreements under the FAA. "At its heart, this is a labor law case, not an arbitration case," the majority emphasized. "The contract here would face the same NLRA troubles if Ernst & Young required its employees to use only courts, or only rolls of the dice or tarot cards, to resolve workplace disputes—so long as the exclusive forum provision is coupled with a restriction on concerted activity in that forum."

The court acknowledged the split in the federal circuits but said it agreed with the Seventh Circuit, "the only one that 'has engaged substantively with the relevant arguments,' " as opposed to the Second, Fifth, and Eighth Circuits. Vacating the district court's order, the panel remanded the case for a determination of whether the "separate proceedings" clause is severable from the contract.

One judge dissented from the opinion, writing that the majority failed to follow the FAA's command to enforce arbitration agreements according to their terms and "effectively cripples the ability of employers and employees to enter into binding agreements to arbitrate."

Neither Section 7 nor Section 8 specifies the right to take legal action at all, whether individually or collectively, Judge Sandra Ikuta wrote, and while "the NLRA protects concerted activity, it does not give employees an unwaivable right to proceed as a group to arbitrate or litigate disputes."

In a legal context, "concerted" activity could include "joint legal strategies, shared arguments and resources, hiring the same attorneys, or even requesting the Department of Labor to bring an independent action against the employer," the dissent added. "But the language does not expressly preserve any right for employees to use a specific procedural mechanism to litigate or arbitrate disputes collectively; even less does it create an unwaivable right to such mechanism."

To read the opinion in Morris v. Ernst & Young LLP, click here.