Recently, the Ninth Circuit Court of Appeals issued an opinion in Morris v. Ernst & Young holding that class action waiver in an arbitration agreement were unenforceable because the class action waiver was contrary to the rights provided to employees under the National Labor Relations Act. The ruling is contrary to the holdings in the Second, Fifth, and Eight Circuits that concluded that the NLRA does not invalidate collective action waivers in arbitration agreements, creating a split in the circuits. Given this split in the circuits, the case may potentially be reviewed by the United States Supreme Court. For now, however, what should California employers take away from the case? This Friday’s Five answers five issues California employers should understand about this changing area of the law:
1. What is an arbitration agreement?
Employers can agree that they and any employees who enter into an arbitration agreement will resolve their differences before a private arbitrator instead of civil court. There are many different arbitration companies to choose from, but the American Arbitration Association and JAMS are two of the larger ones that are routinely appointed in arbitration agreements.
2. Why would an employer want to implement an arbitration agreement?
There are a number of reasons. The arbitration process can proceed more quickly than civil litigation, saving a lot of time and attorney’s fees in the process. For example, often times the discovery process moves more quickly, and if there are any disputes, the parties can raise them with the arbitrator telephonically, instead of the lengthy motion process required to resolve disputes in civil court. The arbitration process is also confidential, so if there are private issues that must be litigated, these issues are not filed in the public records of the courts. The parties also have a say in deciding which arbitrator to use in deciding the case, whereas in civil court the parties are simply assigned a judge without any input into the decision. This is very helpful in employment cases, which often times involve more complex issues, and it is beneficial to the parties to select an arbitrator that has experience in resolving employment cases.
While there are many benefits of arbitration agreements, they do not come without a few drawbacks. The primary drawback is that in California, the employer must pay all of the arbitrator’s fees in employment cases. Arbitration fees can easily be tens of thousands of dollars – a cost that employers do not need to pay in civil cases. However, if the company values the confidentiality and speed of process provided in arbitration, this extra cost may well be worth it.
3. Are class action waivers enforceable in arbitration agreements?
That is the key issue raised in the Morris v. Ernst & Young case. Many courts have been upholding arbitration agreements that contain class action waivers, including the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC. That case held that class action waivers are enforceable, following the standards set forth by the U.S. Supreme Court in AT&T Mobility v. Concepcion.
However, the Ninth Circuit’s ruling in the Morris case creates some uncertainty about whether arbitration agreements that contain class action waivers can be enforced. The arbitration agreements in the Morris case were mandatory, and they contained a “concerted action waiver” clause preventing employees from bringing a class action. Plaintiffs claimed that the “separate proceedings” clause contravenes the National Labor Relations Act (“NLRA”), 29 U.S.C. §§ 151 et. seq. The Ninth Circuit held:
This case turns on a well-established principle: employees have the right to pursue work-related legal claims together. 29 U.S.C. § 157; Eastex, Inc. v. NLRB, 437 U.S. 556, 566 (1978). Concerted activity—the right of employees to act together—is the essential, substantive right established by the NLRA. 29 U.S.C. § 157. Ernst & Young interfered with that right by requiring its employees to resolve all of their legal claims in “separate proceedings.” Accordingly, the concerted action waiver violates the NLRA and cannot be enforced.
As mentioned above, this holding is contrary to the holdings in the Second, Fifth, and Eight Circuits that have concluded that the NLRA does not invalidate collective action waivers in arbitration agreements. For California employers, the Morris holding creates a strange current state of the law where arbitration agreements with class action waivers may be enforceable in state courts under the Iskanian ruling, but may not enforceable in federal court under the Morris v. Ernst & Young ruling.
4. Should every employer implement arbitration agreements with its employees?
No. The decision to implement an arbitration agreement should be reviewed with an employment lawyer to discuss the positives as well as the negatives of arbitration agreements.
5. Are arbitration agreements enforceable in California?
Generally speaking, if the agreement is drafted and implemented properly, it is enforceable. The holding in Morris v. Ernst & Young does not change the enforceability of arbitration agreements, but rather focuses on the issue of whether a class action waiver contained in an arbitration agreement is enforceable. In addition, arbitration agreements are routinely struck down by courts if they are not properly drafted. For example, a California court held in Ajamian v. CantorCO2e, that an arbitration agreement was not enforceable because it required the employee to waive statutory damages and remedies. In addition, the agreement in that case only allowed the employer to recover its attorney’s fees if successful, not the employee. This flaws in the arbitration agreement were fatal to the enforceability of the agreement. Therefore, as a good lawyer always says, it is critical that employers considering implementing arbitration agreements review the pros and cons of the decision, and receive assistance in drafting the arbitration agreement.