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The Curious Case of Employment Arbitration Agreements

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by Tal Burnovski Yeyni



Oh boy, what a year 2016 is shaping up to be! Employers faced some daunting changes to: Sick Leave, California Minimum Wage, the DOL final rule  re salary thresholds and now – class action waivers. We feel like doing a Liz Lemon style “12 month rap wrap up”. But unlike Avery Jessup in 30 Rock, reading some US Weeklies won’t resolve the situation. (If you don’t understand, go watch ”The Return of Avery Jessup”. It’s hilarious!) 

Class Action LawsuitMeanwhile, in the real world, we noticed a trend in California to limit the scope of employment arbitration agreements. Two years ago the California Supreme Court ruled that PAGA (Private Attorneys General Act) representative claim waivers in employment arbitration agreements are unenforceable (Iskanian v. CLS Transp. Los Angeles, LLC (2014) 59 Cal.4th 348).

And last year the legislature attempted to pass AB-465 which would have prohibited employers from requiring employees to sign arbitration agreements as a condition of employment. Governor Brown however, vetoed the bill opining, in part, that “[A] blanket ban on mandatory arbitration agreements is a far-reaching approach...”

Last week the Ninth Circuit took part in the “arbitration debate” and held that Class Action Waivers in employment arbitration agreements are unenforceable. In Morris v. Ernst & Young LLP (9th Cir. 8/22/2016) No. 13-16599 plaintiffs brought a class action against the accounting firm Ernst & Young for misclassification,  FLSA (Fair Labor Standards Act) and California labor laws violations.

The professional services firm moved to compel arbitration pursuant to the arbitration agreements signed by plaintiffs, which contained a “concerted action waiver” requiring employees to pursue legal claims against E&Y exclusively through arbitration, and arbitrate only as individuals and in “separate proceedings.”  Plaintiffs argued the class action waiver was unenforceable as it violated the National Labor Relations Act (NLRA).

Section 7 of the NLRA guarantees the right of employees to engage in concerted activities. Section 8(a)(1) of the Act makes it an unfair labor practice for an employer "to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in Section 7" of the NLRA.

The Ninth Circuit in a majority decision agreed with plaintiffs and sided with the National Labor Relations Board (NLRB) position in Horton I, 357 NLRB No. 184, which held that an employer violates the NLRA “when it requires employees covered by the Act, as a condition of their employment, to sign an agreement that precludes them from filing joint, class, or collective claims addressing their wages, hours, or other working conditions against the employer in any forum, arbitral or judicial.”

The Majority opined that a lawsuit filed in good faith by a group of employees to achieve more favorable terms or conditions of employment is “concerted activity” under Section 7 of the NLRA and reasoned that “an employer violates § 8 (...) by conditioning employment on signing a concerted action waiver.” [Emphasis added]. 

Employment ArbitrationWith this decision, the Ninth Circuit teamed up with the Seventh Circuit which recently held that a class action waiver in arbitration agreements was unenforceable as it violated employees’ rights under the NLRA. Other circuits (the Second, the Eighth and the Fifth) held to the contrary, validating class action waivers in employment arbitration agreements. Due to the circuit split, it is likely the matter will be taken up to the U.S. Supreme Court. 

It will be interesting to see how California courts would handle the matter (if at all). Notably, while the California Supreme Court prohibited PAGA waivers in employment arbitration agreements it rejected the argument that class action waivers are unlawful under the NLRA (Iskanian, supra, 59 Cal.4th at 372). “As the Fifth Circuit explained, neither the NLRA’s text nor its legislative history contains a congressional command prohibiting such waivers.” 

Thus, on its face, it appears the California Supreme Court position regarding the enforceability of class action waivers currently differs from the Ninth Circuit’s recent ruling.

To be continued . . .

Tal Burnovski Yeyni is an attorney in our Employment Practice Group

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