Ninth Circuit: Class Action Waivers in Employment Contracts Violate Federal Law

In an important ruling, Morris v. Ernst & Young, the U.S. Court of Appeals for the Ninth Circuit held that employment contracts requiring employees to arbitrate suits individually, rather than on a class or collective basis, violate employees’ right to engage in “concerted activity” under the National Labor Relations Act (NLRA). The decision is one of several in the past few months invalidating class action waivers in employment agreements.

Employees of Ernst & Young brought a class action in federal court alleging the accounting firm denied them overtime wages in violation of the Fair Labor Standards Act (FLSA) and California labor laws. In the district court, Ernst & Young successfully moved to compel individual arbitration because the employment contract required employees to arbitrate disputes in “separate proceedings,” and the action was dismissed. The Ninth Circuit, however, reversed.

Writing for himself and Judge Hurwitz, and over the dissent of Judge Ikuta, Chief Judge Thomas concluded that an employer violates § 7 and § 8 of the National Labor Relations Act by requiring employees to sign an agreement precluding them from bringing, in any forum, work-related legal claims together. The court agreed with the National Labor Relations Board that the NLRA establishes a federal right of employees to pursue work-related legal claims together in some forum—arbitration, court, or elsewhere. An arbitration agreement which requires employees to resolve all their legal claims individually is illegal and unenforceable because it interferes with that “essential, substantive” right. The Ninth Circuit also held that the Federal Arbitration Act’s (FAA’s) savings clause, 9 U.S.C. § 2, prevents the enforcement of a waiver of an employee’s substantive right to join together with other employees to pursue workplace grievances in some forum.

The Ninth Circuit ruling deepens a circuit-level split. Compare Lewis v. Epic Sys. Corp., — F.3d — , 2016 WL 3029464 (7th Cir. 2016) (arbitration agreement waiving the right to collective legal action under the NLRA is “illegal” and thus unenforceable under the FAA’s savings clause), with Murphy Oil USA, Inc. 808 F.3d 1013 (5th Cir. 2015) (enforcing concerted action waiver under FAA); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1053–54 (8th Cir. 2013). District courts outside those circuits, however, continue to invalidate concerted action waivers—a positive development for workers.

For example, in Tigges v. AM Pizza, Inc., No. CV 16-10136-WGY, 2016 WL 4076829 (D. Mass. July 29, 2016), pizza delivery and franchise employees of Domino’s filed a putative class action asserting violations of the Massachusetts minimum wage and tips law. Domino’s argued that its employment agreement barred employees from bringing a class action. But the district court refused to enforce the arbitration agreement, holding instead that the class action waiver was unenforceable because collective action is “the very essence of labor rights” granted to employees under the National Labor Relations Act. Id. at *1.

Similarly, in Gaffers v. Kelly Servs., Inc., No. 16-10128, 2016 WL 4445428 (E.D. Mich. Aug. 24, 2016), an action under the FLSA, the district court refused to enforce an arbitration provision which purported to bar any collective action by employees. The court found this provision to be illegal and unenforceable because it “force[s] employees to waive their non-waivable FLSA right to a collective action.” Id. at *1.