Later this year, the Supreme Court of the United States will address the enforceability of class action waivers in employment arbitration agreements in Ernst & Young LLP v. Morris. The Supreme Court’s decision will resolve a disagreement among the National Labor Relations Board (“NLRB”) and several courts of appeals over whether arbitration agreements that prohibit employees from participating in “any class, collective, or representative proceeding” violate the employees’ right to engage in concerted activity under the National Labor Relations Act (“NLRA”). If the Supreme Court rules that class action waivers violate the NLRA, then the decision whether to include such waivers in employment arbitration agreements is easy. Otherwise, employers will have to consider several pros and cons when deciding whether class action waivers should be included in their employee arbitration agreements.
Countless newsletters and client alerts have been written about the pros and cons of employment arbitration agreements in which an employee and employer agree to arbitrate disputes between them rather than sue each other in court. See, e.g., Peter R. Rich, Pros and Cons of Employee Arbitration Agreements – A Practical Discussion. It is now well settled that courts will enforce employment arbitration agreements like any other contract. See Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001). A class action waiver adds another layer of protection to the agreement: it requires that an employee arbitrate claims against an employer on an individual, rather than collective, basis.
While courts have enforced class action waivers outside the employment context, e.g., Salem Int’l Univ., LLC v. Bates, 793 S.E.2d 879 (W. Va. 2016), the NLRA adds a wrinkle for agreements involving employees protected by the NLRA. Under section 7 of the NLRA, employees have the right to engage in concerted activity for, among other things, their mutual aid and protection. This includes employees’ efforts “to improve their working conditions through resort to administrative and judicial forums.” Eastex, Inc. v. NLRB, 437 U.S. 556, 565-566 (1978). In 2012, the NLRB proclaimed that, “notwithstanding the Federal Arbitration Act,” agreements to arbitrate on an individual basis (and waiving the right to proceed on a class or collective basis) with non-management employees violate section 7 of the NLRA. D. R. Horton, Inc., 357 N.L.R.B. 2277 (2012).
Since D. R. Horton, several courts of appeals have considered the NLRB’s position. The Second, Eighth and Fifth Circuits have rejected the NLRB’s position. Consequently, federal courts in 13 states (Connecticut, New York, Vermont, Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Texas, Louisiana and Mississippi) will enforce class action waivers in employment and arbitration agreements. The Seventh and Ninth Circuits, however, supported the NLRB’s position, meaning federal courts in seven states (Illinois, Indiana, Wisconsin, Alaska, Arizona, California and Hawaii) will not enforce class action waivers in employment arbitration agreements. That is the issue the Supreme Court will resolve during the upcoming term in Ernst & Young LLP v. Morris. The Fourth Circuit, which includes federal courts in Maryland, North Carolina, South Carolina, Virginia and West Virginia, has ordered that an appeal of a district court opinion rejecting the NLRB’s position be held in abeyance pending the Supreme Court’s decision in Ernst & Young LLP v. Morris. Carmax Auto Superstores, Inc. v. Sibley, 215 F. Supp. 3d 430, 432 (D. Md. 2016).
If the Supreme Court holds that class action waivers violate the NLRA, then the decision for employers is easy—do not include class action waivers in employment arbitration agreements with non-management employees. If, however, the Supreme Court holds that class action waivers do not violate the NLRA, employers will have to decide whether to include these provisions in employment arbitration agreements. Rather than blindly assume they will be better off with class action waivers, employers should critically assess whether they are desirable for their business. There are obvious benefits to class action waivers. They eliminate the risk of the legal blackmail that accompanies the exponential nature of exposure in class actions. Also, negotiating a settlement with one person is always easier than several. The consequences are less obvious. Class actions can efficiently resolve an entire class of employees’ claims all together. Instead of worrying about litigating several copycat claims, an award for the employer or settlement may wipe out all class members’ claims. On the other hand, if the employer wins the initial individual arbitration case, it may serve to dissuade prospective copycats from bringing the same claim, which effectively achieves the same effect.
Of course, if you have any questions about the pros and cons of class action waivers, please contact us.
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