Many employees are required to sign agreements waiving their right to bring a class action suit against their employer over wages, hours, and terms and conditions of employment. But most of them don’t dispute the validity of such waivers. In Morris v. Ernst & Young, LLP, employees took their case to the Ninth Circuit Court of Appeals, appealing a lower court ruling and arguing that their employer had violated the National Labor Relations Act (NLRA).

SEPARATE PROCEEDINGS MANDATED

Employees brought a class and collective action against their employer claiming misclassification as exempt, in violation of the NLRA, and failure to pay overtime. As a condition of employment, the employer had required them to sign concerted action waivers stating that the employees would only pursue legal claims against the employer through arbitration and would arbitrate as individuals in “separate legal proceedings.” In other words, the employees couldn’t join together and pursue concerted legal claims against the employer in court, by arbitration or in any other forum.

The employer moved to compel arbitration pursuant to the waivers. The trial court granted the employer’s motion and dismissed the case.

LABOR ACT VIOLATED

When the employees appealed, they argued that the concerted action waivers they had signed were unlawful under the NLRA as determined by the National Labor Relations Board (NLRB). The employer responded that pursuant to the Federal Arbitration Act (FAA) the waivers were enforceable arbitration agreements.

But the appeals court sided with the employees. It held that the waivers the employees were required to sign violated the NLRA by interfering with the right of employees to pursue concerted work-related legal claims. The court gave “considerable deference” to the NLRB’s interpretation of the NLRA that employers violated the act when they required employees to sign agreements that precluded them from filing joint, class or collective claims addressing their working conditions in any forum.

The court further stated that the NLRB was correct in finding that the agreement requirement of pursuing claims only as individuals and in “separate legal proceedings” interfered with the employees’ Section 7 and Section 8 rights under the NLRA. Sec. 7 gives employees the right to collectively seek to improve working conditions. Sec. 8 prevents employers from defeating employees’ rights by requiring employees to pursue their claims individually. Therefore, the “separate proceedings” section of the waiver was unenforceable, according to the court.

ARBITRATION ACT INTERPRETED

The court also disagreed with the employer’s argument that the FAA required enforcement of the waivers. The FAA requires courts to enforce arbitration contracts according to their terms and on a level equal to other contracts. Although the FAA favored enforcement of arbitration agreements, the court held that the FAA couldn’t be constructed to allow waivers of NLRA rights, because the statutes would then be in conflict.

For the court, the waiver’s arbitration requirement wasn’t at issue, but the ban on concerted activities was. When the defense of illegality is raised, the FAA treats an illegal provision in an arbitration agreement just as it would an illegal provision in another type of contract. The offending provision can be deleted or a court can decide to decline enforcement of the entire contract. In this case, the court vacated the trial court’s determination and remanded to determine whether the arbitration agreement’s “separate proceedings” clause was severable from the rest of the contract.

NO CONSENSUS

Circuit courts have been split over the enforceability of class action waivers that demand arbitration as the venue for redress because of potential conflict between the NLRA and FAA. Therefore, employers need to ensure that their class action waivers are enforceable in their jurisdictions. Otherwise, even after signing waivers, employees will be able to file class and collective actions against their employer. Such actions can be very costly to defend when compared to single plaintiff claims and arbitration.