Class Action Waivers in Employment Contracts: The Clash Between the National Labor Relations Act and the Federal Arbitration Act

Abstract

This article analyzes and comments on the Supreme Court appeal in Ernest & Young LLP v. Morris, to be argued before the Court in October 2017.  The Court will decide if the provisions of National Labor Relations Act  effectively invalidate class action waivers in employment arbitration clauses, requiring that employees arbitrate their grievances on an individual, rather than a collective basis. 

The facts underlying Ernest & Young LLP v. Morris are relatively straightforward. Stephen Morris and Kelly McDaniel were Ernest & Young employees, the accounting and financial services company. In 2012, Morris and McDaniel filed an action in federal court in the Southern District of New York alleging that they had been misclassified as employees for the purposes of overtime pay under the Fair Labor Standards Act (FSLA) and California law. 29 U.S.C. §§ 201-219. The plaintiffs sought back pay. Their action was pursued as a collective action under the FSLA, with a separate federal class action of California employees.

The court transferred the case to the Northern District of California. Ernst & Young moved to dismiss and to compel arbitration pursuant to the employment contract, contending that the plaintiffs had consented to the arbitration provision by signing their employment contracts. In response, the plaintiffs countered that the arbitration clause was unenforceable because collective-bargaining provisions of the National Labor Relations Act (NLRA) conferred a non-waivable right to collective litigation. 29 U.S.C. §§ 151-169.

The court granted Ernst & Young’s motion to dismiss. The court concluded that it was required to enforce the employment contract according its terms, because Congress in enacting the NLRA did not expressly provide that it was overriding any provisions in the Federal Arbitration Act. 9 U.S.C. § 2. The Arbitration Act embodied a strong policy choice in favor of enforcing arbitration agreements. A divided panel of the Ninth Circuit reversed the district court’s decision, and remanded for further proceedings. Section 7 of the NLRA provides: “Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection . . . “

Construing Section 7, the majority indicated that Section 7 established a substantive right for employees “to pursue work-related legal claims, and to do so together.” Ernst & Young’s employment contract prevented collective activity by its employees in arbitration proceedings, and interfered with a protected Section 7 right. Consequently, the collective waiver provision in Ernst & Young’s employment contract was unenforceable. The court further held that the Arbitration Act did not dictate a contrary result. The Arbitration Act’s saving clause provides that arbitration clauses are enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The court held that Ernst & Young’s arbitration provision was prohibited by the NLRA and was therefore unenforceable.

The Court’s consideration of the Ernst & Young appeal continues the Court’s recent attention to arbitration clauses and class action waivers. See generally American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013); CompuCredit Corp. v. Greenwood, 565 U.S. 95 (2012); AT & T Mobility LLC v. Concepcion, 563 U.S. 33 (2011); Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010); and Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000). In particular, the Court will for the first time take up the controversial question of class action waivers included in employment contracts that contain arbitration clauses. The controversy centers primarily on a question of statutory construction of the NLRA in relation to the Arbitration Act.

The Ernst & Young appeal is significant because the Court will now weigh in regarding the enforceability of arbitration clauses contained in employment contracts, particularly such provisions that also contain class action waivers. If enforced, contractual arbitration clauses force employees to arbitrate their grievances with their employers and to forego litigation in court. The addition of class action waivers in arbitration clauses deprives employees of the ability to pursue class action litigation either in judicial forums or in arbitration.

The Court’s ruling in Ernst & Young is tremendously important because of the prevalence of arbitration clauses embedded in employment contracts. Employers nationwide now routinely include arbitration provisions in their employment contracts. The Court’s initial arbitration jurisprudence centered on arbitration provisions in consumer product contracts and warranties. Until now, the Court has not considered the enforceability and legality of arbitration clauses in employment contracts. The Court’s decision potentially will affect millions of workers.

In the consumer arena, the Court’s arbitration jurisprudence generally has not been sympathetic to plaintiffs’ attempts to invalidate and render arbitration clauses unenforceable. Instead, the Court has defaulted to the policy favoring arbitration and the enforceability of arbitration clauses as a matter of contract law. Moreover, the Court has consistently deflected various challenges to class action waivers contained in arbitration clauses.

Although the Court has upheld the primacy of the Arbitration Act in cases involving allegedly conflicting statutes, the purported clash of the Arbitration Act with the NLRA may present the Court with a closer call. The Court may focus on the NLRA’s statutory language repeatedly referring to the protection of collective worker rights under the law. The Court might well rely on this statutory language to find Congressional intent to override the Arbitration Act. On the contrary, if the Court resorts to a requirement of express Congressional intent to supersede the Arbitration Act, the plaintiffs’ appeal may fail to gain support.

Recognizing the magnitude of the Court’s decision relating to employer-employee rights, an array of amicus briefs have been filed in support of the contending parties. Unsurprisingly, the business community and assorted defense organizations have supplied briefs in furtherance of Ernst & Young’s position on the primacy of the Arbitration Act over the NLRA. Countering this, a usual collection of liberal groups, labor organizations, and civil rights advocates have joined to urge the Court to uphold the Ninth Circuit’s decision rendering Ernst & Young’s arbitration provision unenforceable.