If your company uses a class action waiver in your employment agreements and you are located in Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, the Northern Mariana Islands, Oregon, or Washington, you are out of luck. Thanks to a recent decision from the Ninth Circuit Court of Appeals (which has jurisdiction over the aforementioned areas), that waiver is no longer enforceable.
Recently, the Court ruled in Morris v. Ernst & Young, LLP, No. 13-16599, 2016 WL 4433080 (9th Cir. Aug. 22, 2016), that an employment agreement that requires employees to pursue legal claims against their employer in “separate proceedings” and in arbitration violates federal law. In that case, two employees sued Ernst & Young alleging they were misclassified as exempt employees under the Fair Labor Standards Act and were owed overtime pay. The trial court compelled individual arbitration, pursuant to the “separate proceedings” in arbitration demanded by the employment agreement the two employees signed upon hire. The Ninth Circuit reversed.
Employees are guaranteed the right to “engage in . . . concerted activities for the purpose of . . . mutual aid or protection” by the National Labor Relations Act. The Court held that protection for “concerted activities” means that employers cannot require employees to waive their right to pursue legal claims as a class action.The prohibition on class action waivers applies to court as well as arbitration. The agreement before the Court mandated individual arbitration, but the Court noted that waiving court class actions is also prohibited. It declared that the “illegality of the ‘separate proceedings’ term here has nothing to do with arbitration as a forum. . . . The same infirmity would exist if the contract required disputes to be resolved through casting lots, coin toss, duel, trial by ordeal, or any other dispute resolution mechanism . . . . the problem . . . is that the contract term defeats a substantive federal right to pursue concerted work-related legal claims.” Accordingly, all class waivers in employment agreements are unenforceable.
By prohibiting class action waivers in employment agreements, the Ninth Circuit joined the Seventh Circuit in a split among federal courts. The Fifth, Second, and Eighth Circuits approve of class action waivers in employment agreements. Given that split, and the prevalence of class action waivers, this issue is almost certain to reach the Supreme Court. The outcome of that review, however, is as uncertain as the identity of the next Justice, and it may be decided by that Justice’s vote.
So what does this mean for employers stuck in states in the Ninth or Seventh Circuits? For now, it means any class action waivers you have in your employment agreements are no longer enforceable. Here are a few options. You can scrub your agreements of class action waivers but maintain mandatory arbitration, forcing legal claims – individual and class – into arbitration. Before doing so, however, discuss with your legal counsel whether defending a class action is easier in court than in arbitration. If so, you could require that individuals arbitrate their claims, but also mandate that class actions be heard in court. Finally, if you have employees in and beyond the Ninth Circuit, you could consider language that confirms the waiver is enforceable to the extent applicable law allows.