The Supreme Court To Determine Validity of Class Action Waivers In Employment Arbitration Agreements

Nicholas Fortuna, January 27, 2017

The U.S. Supreme Court will decide whether class and collective action waivers in employment arbitration agreements violate the National Labor Relations Act (NLRA). The Court agreed to hear three cases relating to this issue:

National Labor Relations Board v. Murphy Oil USA (No. 16-307). A collective action against Murphy Oil USA Inc., which operates more than 1000 retail gas stations in several states, alleging the company violated the Fair Labor Standards Act (FLSA). The district court dismissed the collective action and compelled arbitration. The Fifth Circuit affirmed.

Epic Systems Corp. v. Lewis (No. 16-285). A wage and hour collective action against Epic Systems, a health care software company, alleging that it misclassified technical writers as exempt in violation of FLSA. The district court denied the employer’s motion to compel arbitration and the Seventh Circuit affirmed.

Ernst & Young LLP v. Morris (No. 16-300). A collective action claiming Ernst & Young misclassified employees to deny overtime wages in violation of the FLSA. The Ninth Circuit held that the employer violated the NLRA by requiring employees to sign an arbitration agreement preventing them from bringing class and collective actions.

The NLRB has issued numerous decisions invalidating arbitration agreements because they contain class and collective action waivers. The Board’s position is that such waivers limit employees’ right under the NLRA to engage in “concerted activities” in pursuit of their “mutual aid or protection” and are unenforceable under the Federal Arbitration Act (FAA).

The Supreme Court has consistently held that class action waivers contained in arbitration agreements are enforceable under the FAA. The question of how to reconcile the FAA and the NLRA has been circling the appellate courts. A circuit split developed between the Fifth, Second, and Eighth Circuits upholding the waivers and the Seventh and Ninth Circuits invalidating them.

The NLRA provides that “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.” The NLRA declares it an unfair labor practice to “interfere with, restrain or coerce employees in the exercise of the rights guaranteed” under the statute.

On one side, some courts and the NLRB find that forcing employees to waive collective and class actions in an arbitration agreement violates the right to “concerted activity” under the NLRA. This side permits arbitration of employee disputes under the FAA, but asserts that such arbitrations must allow for collective or class actions. On the other side, courts are relying on the Supreme Court’s precedent of giving deference to arbitration over judicial action under the FAA. These courts have held that the FAA has a preemptive effect and that all state and federal laws interfering with the enforcement of arbitration agreements in accordance with their terms must give way.

The outcome of these cases could depend on the appointment of a ninth justice to the court. Historically, arbitration enforcement cases have been decided by a closely divided court. This is not an easy one to predict. How the Court resolves the clash between the right to “concerted activity” and the deference given to the FAA will be closely watched. Employers must take another look at their arbitration agreements to ensure that they comply with the Supreme Court’s ruling in these cases.