In Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. Cal. Aug. 22, 2016), the Ninth Circuit vacated the district court's order compelling individual arbitration in an employees' class action alleging that Ernst & Young misclassified employees to deny overtime wages in violation of the Fair Labor Standards Act and California labor laws.
As a condition of employment, the employees were required to sign agreements that contained a "concerted action waiver" requiring the employees to pursue legal claims against Ernst & Young exclusively through arbitration, and arbitrate only as individuals and in "separate proceedings."
The court held that that an employer violates § 7 and § 8 of the National Labor Relations Act (NLRA) by requiring employees to sign an agreement precluding them from bringing, in any forum, a concerted legal claim regarding wages, hours, and terms of conditions of employment. The court held that Ernst & Young interfered with the employees' right to engage in concerted activity under the NLRA by requiring the employees to resolve all of their legal claims in "separate proceedings." The court concluded that the "separate proceedings" terms in the Ernst & Young contracts could not be enforced.
The court explained that the NLRA establishes a core right to concerted activity. Irrespective of the forum in which disputes are resolved, employees must be able to act in the forum together. Arbitration, like any other forum for resolving disputes, cannot be structured so as to exclude all concerted employee legal claims. When private contracts conflict with the NLRA, they must yield or the act would be reduced to a futility. Additionally the court stated that a "separate proceedings" provision of an employment contract interferes with a substantive federal right protected by NLRA (§7) and the NLRA precludes contracts that foreclose the possibility of concerted work-related legal claims.
The court stated that a distinction exists between substantive rights and procedural rights in federal law. Rights that are the essential, operative protections of a statute are substantive rights. In contrast, procedural rights are the ancillary, remedial tools that help secure the substantive right. Substantive rights cannot be waived in arbitration agreements. By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum. Thus, if a contract term in an arbitration agreement operates as a prospective waiver of a party's right to pursue statutory remedies for substantive rights, courts should have little hesitation in condemning the agreement. The Federal Arbitration Act (FAA) does not mandate the enforcement of contract terms that waive substantive federal rights. Thus, when an arbitration contract professes the waiver of a substantive federal right, the FAA's saving clause prevents a conflict between the statutes by causing the FAA's enforcement mandate to yield.
Practice Point
An employer may not condition employment on the requirement that an employee sign an arbitration agreement that waives employee's substantive federal rights. At least in the Ninth Circuit, these substantive rights include the right to bring collective actions.