In a strong blow to employers, the Ninth Circuit Court of Appeals recently released its opinion in Stephen Morris, et al. v. Ernst & Young, et al., No. 13-16599, D.C. No. 5:12-cv-04964-RMW (August 22, 2016), holding that agreements precluding employees from bringing “concerted actions” such as class and/or collective actions relating to their wages, hours, and terms and conditions of employment are unenforceable under the National Labor Relations Act (NLRA).
In Morris, the appellate court examined whether an employer can force its employees to sign an agreement that: (1) waives their ability to join a class action lawsuit against the employer; and (2) requires that all legal claims against the employer be brought only through arbitration on an individual basis and in separate proceedings.
In the underlying case, two former Ernest & Young (E&Y) employees filed a class and collective action lawsuit claiming that the accounting firm misclassified their jobs as exempt from the overtime pay provisions of the Fair Labor Standards Act (FLSA) to avoid overtime liability. Both employees signed an arbitration agreement when they were hired saying they would not bring future claims against the firm on behalf of a class. Instead, they agreed to pursue such claims on an individual basis in what the agreement called “separate proceedings.” The term “separate proceedings” was not defined in the agreement. Nevertheless, the employees subsequently filed their wage-hour case as a proposed class action. After E&Y informed the district court of the waivers the employees had signed, the case was ordered to be submitted to arbitration on an individual basis. The plaintiffs subsequently appealed to the Ninth Circuit.
The Ninth Circuit examined the class action waiver and determined that interference with an employee’s right to pursue work-related legal claims together, whether in arbitration or other legal proceeding, violates Section 7 and 8 of the NLRA. These provisions seek to protect employees’ rights to engage in concerted activity for the betterment of the terms and conditions of their employment. In its reasoning, the Ninth Circuit considered the “separate proceedings” language in the arbitration agreement to be “illegal,” rendering it unenforceable.
The finding of illegality was surprising to many since the Federal Arbitration Act specifically allows employees and employers to define the terms of their arbitration agreements so long as the employee is not required to waive a substantive federal right. In reaching its conclusion, the Ninth Circuit determined that the ability to bring a class or collective action is a substantive federal right.
The Ninth Circuit joins the Seventh Circuit in holding that class action waivers are unenforceable, while the Second, Fifth, and Eight Circuits still enforce such waivers. As a result, the issue is ripe for consideration by the Supreme Court.
In light of this Ninth Circuit ruling, employers will likely see additional challenges to their arbitration agreements and should take a careful look at them. Employers looking to maximize the effectiveness of their agreements should consider including savings clauses to prevent complete unenforceability of the agreements. As the focus on potential wage-hour violations continues to increase in workforce popularity, now is also a good time for employers to review their wage and hour practices to minimize potential exposure to employment class actions in this area.
Employers in Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington are immediately impacted by the Ninth Circuit’s decision as it nullifies the ability of an employer to prevent employees from bringing class and/or collective actions by agreement.