A divided panel (2-1) of the 9th Circuit Court of Appeals has ruled that an employer violates the National Labor Relations Act by requiring employees to sign arbitration agreements that contain class or collective action waivers. Morris v. Ernst & Young, No. 13-16599 (9th Cir. Aug. 22, 2016). The 9th Circuit joins the 7th Circuit and takes the minority view among federal appellate courts who agree with the National Labor Relations Board that such waivers are unenforceable. The 2nd, 5th, 8th, and 11th Circuits have all concluded such waivers do not violate the NLRA. This issue will likely not be resolved until the Supreme Court rules.

Ernst & Young required employees to sign agreements containing a “concerted action waiver” as a condition of employment. This waiver required that employees pursue legal claims against Ernst & Young exclusively through arbitration and then, only as individuals and in “separate proceedings.” Two Ernst & Young accountants brought class and collective claims in district court alleging that Ernst & Young misclassified them as exempt from overtime and, in doing so, denied them overtime wages in violation of the federal Fair Labor Standards Act and California labor laws. The district court, relying on the arbitration agreements, ordered the employees to individual arbitration and dismissed the lawsuit.

The 9th Circuit reversed largely adopting the reasoning of the National Labor Relations Board in its D.R. Horton, Inc., 357 NLRB No. 184 (2012), and Murphy Oil USA, Inc., 361 NLRB No. 72 (2014) decisions. The 9th Circuit held that the National Labor Relations Act gives employees the right to pursue legal claims “together”—i.e. on a class or collective basis. Ernst & Young’s “concerted action waiver,” in the 9th Circuit’s view, violates the NLRA by preventing, or interfering with, employees in exercising their NLRA rights. The 9th Circuit also held that an employer violates the NLRA by conditioning employment of signing an agreement that contains a class or collective action waiver.

In the opinion of the 9th Circuit panel, Ernst & Young’s agreement did not implicate the Federal Arbitration Act (FAA) because the arbitration requirement was lawful, whereas the concerted action waiver was not because, according to the 9th Circuit, the right to pursue legal claims on a concerted basis is a substantive right that cannot be waived. It is likely that Ernst & Young will appeal the panel decision—which was not unanimous—to the full 9th Circuit. In any event, the 9th Circuit’s decision makes it likely that the U. S. Supreme Court will need to resolve the issue of whether class and collective action waivers in arbitration agreements are enforceable or run afoul of the NLRA. In past decisions, the Supreme Court has generally favored arbitration decisions and held that they are enforceable, even when they contain class or collective action waivers. Many of these decisions have been split decisions, and the outcome of future decisions may depend on the makeup of the court.

In the face of this uncertainty, employers in the 9th Circuit region who do not have class action waivers in their arbitration agreements—or do not have arbitration agreements at all—may want to wait for further certainty before adopting them. Employers in the 9th Circuit who have existing employment arbitration agreements with class action waivers may want to consider revising their agreements. For example, adding opt out language—so that the agreements are not mandatory conditions of employment—is a relatively simple fix. Although the NLRB has not favored opt out clauses, the 9th Circuit opinion suggests that it would find opt out clauses lawful. Employers should also strongly consider adding a blow-up provision that invalidates the arbitration agreement and requires class or collective claims to proceed in court in the event that a waiver is deemed invalid. Class arbitrations can prove to be unwieldly and generally are not preferred because of cumbersome and expensive discovery, arbitrator fees and administrative fees, decisions of an arbitrator are not necessarily better than judges or juries, and the right to appeal an adverse outcome is virtually impossible.