Ernst & Young’s (“E&Y”) employment agreements contained “separate proceedings” and arbitration provisions, which together required that disputes be resolved individually through arbitration, rather than collectively through some other forum. Despite entering such an agreement, an employee filed a class action against E&Y in federal court, alleging that he and other employees had been misclassified and denied overtime wages in violation of the Fair Labor Standards Act. E&Y moved to compel individual arbitration based on the “separate proceedings” and arbitration provisions in the employment agreement. The district court agreed with E&Y, ordering individual arbitration and dismissing the class action. The employee appealed, and a divided Ninth Circuit panel reversed.

On appeal, the employee argued that the concerted action waiver violated several federal statutes, including the National Labor Relations Act (NLRA), relying on the National Labor Relations Board’s (NLRB) interpretation that such waivers violate the NLRA. The Ninth Circuit agreed, finding that the NLRA’s plain language, stating that employees have the right “to engage in [ ] concerted activities” and that it is an unfair practice to “interfere with . . . rights guaranteed [under the NLRA],” was consistent with the NLRB’s interpretation.

The court also held that the NLRA’s ban on collective action waivers did not conflict with the Federal Arbitration Act (FAA). Specifically, the court explained that “[t]he illegality of the ‘separate proceedings’ term here has nothing to do with arbitration as a forum. It would equally violate the NLRA for E&Y [ ] to require its employees to sign a contract requiring resolution of all work-related disputes in court and in ‘separate proceedings.’” The court then explained that the right to act collectively was substantive, rather than procedural, and the FAA’s savings clause therefore precluded a conflict between the FAA’s mandate of enforcement of arbitration agreements and the NLRA’s right to collective actions. In so doing, the court stated that “[a]t its heart, this is a labor law case, not an arbitration case” and “[i]rrespective of the forum in which disputes are resolved, employees must be able to act in the forum together.” The court noted a circuit split on the issue and sided with Seventh Circuit over the Second, Fifth, and Eighth Circuits.

The dissenting judge disagreed with the majority’s analysis of the NLRA, stating that “nothing in the [relevant sections of the NLRA] creates a substantive right to the availability to class-wide claims that might be contrary to the FAA’s mandate” on the enforceability of arbitration agreements. The dissent then sided with the Second, Fifth, and Eighth Circuits’ conclusions that “the NLRA does not invalidate collective action waivers in arbitration agreements,” asserting that such decisions were consistent with Supreme Court precedent.

The case was ultimately remanded for the district court to determine whether the “separate proceedings” provision was severable, and the court took “no position on whether arbitration may ultimately be required[.]”

Morris v. Ernst & Young, LLP, No. 13-16599 (9th Cir. Aug. 22, 2016).