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Collective Action Waivers in Arbitration Agreements on a Collision Course to the Supreme Court

Connecticut Law Tribune

November 2, 2016

In the labor and employment world, one big question for employers is: Does an employer violate the National Labor Relations Act (“NLRA”) by requiring employees to sign an agreement to arbitrate any claims concerning their wages, hours, and terms and conditions of employment only on an individual basis, rather than in a class or collective action. More simply, can an employer require employees to waive their right to file class and collective actions if they want to work at the company? (Class and collective actions are law suits involving large numbers of plaintiffs all sharing similar claims, e.g., a class of employees all claiming they have been improperly classified as exempt from overtime.)

NLRA Covers Most Private Employers

The first issue: Does the NLRA apply?  The NLRA applies to most private sector employers, including manufacturers, retailers, private universities, and health care facilities.  The NLRA does not apply to federal, state, or local governments, employers who employ only agricultural workers, and employers subject to the Railway Labor Act.  The NLRA covers most employees employed in the private sector but does not cover agricultural laborers, independent contractors, and supervisors.  Based on the broad reach of the NLRA, this question is pertinent to most employers.

  1. Class Action Waivers: Are They Enforceable or Not? That is the Question of the Year.

D.R. Horton Signals a Change

Since 2012 the application of class and collective action waivers has been up for debate. In January 2012, in D.R. Horton, Inc., 357 NLRB 2277 (2012), the National Labor Relations Board (“NLRB”) held mandatory arbitration agreements that bar class or collective claims over wages or other working conditions are unlawful.  In 2014, despite the rejection of its position by some Circuit Courts of Appeal, the NLRB reaffirmed its position in Murphy Oil USA, Inc., 361 NLRB No. 72 (2014).

Court of Appeals Reject NLRB View

Since the NLRB’s holdings in D.R. Horton and Murphy Oil, Inc., various Circuit Courts of Appeal have weighed in on the issue.  For instance, the Fifth Circuit Court of Appeals has twice rejected the NLRB’s position and held that individual employment agreements containing class and collective action waivers are lawful and enforceable under the Federal Arbitration Act (“FAA”). See D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013) (enforcement of NLRB order denied in relevant part), Murphy Oil v. NLRB, 808 F.3d 1013 (5th Cir. 2015) (enforcement of NLRB order denied in relevant part).  The FAA applies to any written provision in any maritime transaction or a contract evidencing a transaction involving commerce, including employment agreements.  The Fifth Circuit’s reasoning is the FAA’s policy favoring arbitration overrides any concerted activity rights employees have to class or collective action pursuant to the NLRA.

The Second, Eighth, and Eleventh Circuits also reject the NLRB’s position. For instance, in Sutherland v. Ernst & Young, 726 F.3d 290 (2d Cir. 2013), the Second Circuit upheld a class action waiver in an arbitration agreement and refused to defer to the NLRB’s decision in D.R. Horton.  In Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013), the Eighth Circuit upheld a class action waiver in such an agreement, stating it did not owe deference to the NLRB’s reasoning in D.R. Horton, and in Walthour v. Chipio Windshield Repair, LLC, 745 F.3d 1326 (11th Cir. 2014), the Eleventh Circuit found the FLSA does not prohibit an employer from including a collective action waiver in an arbitration agreement.

Ninth and Seventh Circuit Court of Appeals Break Rank

The Seventh and Ninth Circuits, however, agree with the NLRB. Last August, the Ninth Circuit Court of Appeals considered the question in Morris v. Ernst & Young, LLP, 2016 U.S. App. LEXIS 15638 (9th Cir. Aug. 22, 2016), and held such class or collective action waivers do violate the NLRA. The Ninth Circuit agreeing with the Board held E&Y’s “separate proceedings” clause was the “very antithesis of § 7’s substantive right to pursue concerted work-related legal claims.”  The court also noted this is a substantive right that is non-waivable.  Thus, the focus of the Ninth Circuit’s opinion was on barring workers from acting as a group.

The Seventh Circuit also agreed with the NLRB in Lewis v. Epic Systems, 823 F.3d 1147 (7th Cir. 2016), holding that arbitration waiver clauses violate Sections 7 and 8 of the NLRA and is unenforceable under the Federal Arbitration Act. The Court adopted the views of the NLRB in D.R. Horton and Murphy Oil and noted that the NLRB’s view that mandatory arbitration interferes with employees’ rights under Section 7 is a “sensible way to understand the statutory language” of Section 7 of the Act and, for that reason “we must follow it.”

For Ernst & Young, one of the big four accounting firms, the Ninth Circuit’s decision creates quite the conundrum since the Second Circuit held a similar clause is lawful. Therefore, in September 2016, Ernst & Young asked the United States Supreme Court to hear its case to resolve the split amongst the Circuits.  The Supreme Court is expected to hear the case in light of the split in decisions.

  1. The NLRB Maintains Class Action Waivers are Unenforceable.

Despite all the differing opinions in the Circuit Court of Appeals across the country, the NLRB continues to stay the course. For instance, in September, in Gray v. Select Temporaries, LLC, the issue presented to the administrative law judge (and separately to a court) was whether an arbitration provision that when enforced only allowed for individual claims was lawful – even when the agreement itself did not state class or collective actions were prohibited.  Not surprising, the ALJ found it was not.

The facts are not in dispute. Prior to starting work, Gray was sent new hire paperwork that contained two mutual agreements to arbitrate – both of which she initialed.  She also electronically initialed a Personnel Practices Agreement.  She then began work.  When her employment ended a little over a year and a half later, she filed a class action and representative action complaint against Select in Superior Court in California alleging wage and hour claims.  Select moved to compel arbitration of Gray’s individual claims and to dismiss the class claims citing the agreements she signed upon hire.  The Court granted Select’s motion in part and Gray appealed.

Separate and apart from the California state court litigation, Ms. Gray filed an unfair labor practice charge against Select arguing the arbitration provision, although silent on a class action waiver, violated the NLRA. The ALJ noted that because Select not only sought to compel arbitration but also to dismiss the class allegations of her wage and hour claims, the arbitration provision violated the NLRA.  Select also argued that the agreements did not violate the NLRA because they included a carve out provision that allowed the employee to file charges with the NLRB.  The ALJ, however, rejected this argument finding that one but not both of the agreements Ms. Gray signed included this carve out.

Ultimately, the ALJ found Select’s arbitration agreement would be reasonably construed to prohibit employees from engaging in conduct protected by Section 7 of the NLRA and interfere with the Board and its processes. Therefore, yet again, the ALJ maintained the Board’s position that these types of agreements are simply unenforceable.

Where Does All this Conflict Leave Employers?

Location, location, location – is (at least for now) the answer for the enforceability of these types of provisions for employers. Right now, these types of provisions are enforceable in the Second Circuit which covers Connecticut, New York, and Vermont.  However, it remains to be seen if this will remain true if and when the Supreme Court decides the issue.  Even with the Second Circuit allowing such provisions, this does not stop unfair labor practice charges against companies that have agreements with these types of provisions.

Moreover, with the Supreme Court split four to four into liberal and conservative wings, the answer to this looming question may be impacted by the appointment of a ninth justice to fill the empty seat vacated by conservative Justice Scalia’s death.

 Robert G. Brody is the founder of Brody and Associates, LLC. Katherine M. Bogard is an associate at the firm.  Brody and Associates represents management in employment and labor law matters and has offices in Westport and New York City.