Ninth Circuit Court Finds Class Action Waivers Unenforceable

Sets Up Possible Supreme Court Showdown

On September 6, 2016, in Morris v. Ernst & Young, LLP, the Ninth Circuit Court of Appeals joined the Seventh Circuit and the National Labor Relations Board (NLRB) in finding that employers violate the National Labor Relations Act (NLRA) when, as a condition of employment, they require employees to waive their participation in “concerted activities.” The decision creates multiple splits among the nation’s Circuit Courts that almost guarantee Supreme Court review.

The decision stems from a class action lawsuit alleging that Ernst & Young was misclassifying its employees, in violation of the Fair Labor Standards Act (“FLSA”), to deny them overtime wages.

Ernst & Young Employment Agreement Required Separate Proceedings and Mandatory Arbitration

Ernst & Young required that its employees sign agreements containing a “concerted action waiver” clause that obligated the employees to pursue legal claims against EY exclusively through arbitration, and only as individuals in “separate proceedings.” Despite signing the waiver, Plaintiffs Stephen Morris and Kelly McDaniel filed a class and collection action lawsuit against Ernst & Young in federal court, claiming their employer misclassified them, in violation of the FLSA. Ernst & Young sought to require compliance with the individual arbitration clauses.

Concerted Action Is A Substantive Right Under NLRA

Affirming the principle that the right to bring a work related claim together is an essential, substantive right established by the NLRA, the Ninth Circuit found the “separate proceedings” clause to be in violation of the NLRA. The court relied on Section 7 of the NLRA, which grants employees the right "to engage in concerted activities for the purpose of collective bargaining or other mutual aid and protection."

The court likewise relied on Section 8 of the NLRA which makes it illegal for an employer to interfere with the rights established in Section 7.

The court went on to address the relationship between the NLRA and the Federal Arbitration Act ("FAA"), which enforces arbitration agreements unless there are grounds for their revocation. Finding that the problem with the Ernst & Young agreements was not that they contained an arbitration clause, but rather that the agreements defeat a substantive right to pursue work-related claims, the court made clear that the right to pursue claims collectively is a substantive right.

Multiple Splits Almost Guarantee Supreme Court Review

The Ninth Circuit decision creates multiple splits among the federal Circuit Courts and virtually guarantees review by the US Supreme Court.

The Second, Fifth, and Eighth Circuits have enforced concerted action waivers, while the Seventh and Ninth Circuits have found concerted action waivers to be unenforceable. However, while both the Seventh and Ninth Circuits agree that the FAA does not mandate enforcement of a contract that waives the federal substantive right to engage in concerted action, the Ninth Circuit decision is narrower and only allows the enforcement of concerted activity waivers if the employee has the option to opt out.

Contact the attorneys at Brady & Associates if you have questions about collective bargaining or the Fair Labor Standards Act.