Employee’s Substantive Rights Trump Contract Agreements

By: Andrew Federico

The Ninth Circuit has declared that contracts that waive employee’s rights to collectively bring a legal claim against an employer are unenforceable.[1]  Such a condition waiver constitutes an unfair employer interference.

It has been the trend for companies to include such waivers to avoid hefty expenses of class action litigation.[2]  Ernst & Young, a global leader of professional services, conditioned employment on whether employees signed contracts that contained a “concerted action waiver.”[3]  The waiver required employees to (1) pursue legal claims against Ernst & Young exclusively through arbitration and (2) arbitrate only as individuals in “separate proceedings.”[4]

It is the opinion of the Ninth Circuit that “separate proceedings” provisions deny employee’s rights protected by Section 7 of the National Labor Relations Act.[5]  Section 7 allows employees to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”[6]  Furthermore, Section 8 precludes employers from interfering with employee’s Section 7 rights.[7]  Thus when employees, regardless of union membership, are forced to arbitrate individually, their rights are infringed forcing the contracts to be unenforceable.[8]

The dissenting judge argued that such a decision diminishes the Federal Arbitration Act’s (hereinafter “FAA”) command to enforce arbitration agreements.[9]  The dissent argues that the FAA mandates a policy of upholding arbitration agreements, making such agreements “valid, irrevocable, and enforceable.”[10]  Yet, the court answers this objection by reinforcing that the issue lies with the distinction between “substantive” and “procedural” rights.[11]  Whether the forum for legal claims remained in arbitration or a court need not matter, it is the “separate proceedings” provision that limits an employee’s substantive right to bring a claim in concert.[12]

But what is the bigger picture within all of this? The National Labor Relations Board (hereinafter “NLRB”) has fought against companies establishing concerted action waivers, and this decision bears necessary momentum to further such policies.[13]  Three circuits, when faced with such issues regarding these waivers, ruled in favor of companies and against the assertions that employee’s Section 7 “substantive” rights are threatened.  However, in recent months, NLRB policies to counteract concerted action waivers have gained traction in federal courts.  The Seventh Circuit ruled that any contract that restricts Section 7 rights as a condition of employment is an unfair labor practice as it infers with employee’s rights, thus violating section 8.[14]  Now, the Ninth Circuit balances the circuit split and adds fuel to anticipations that appeal to the U.S. Supreme Court, to determine the enforceability of waivers, remains imminent.[15]  Until then, the balancing act between management interests and employee’s rights continues on.

[1] Morris v. Ernst & Young, LLP, No. 13-16599, 2016 WL 4433080, at *11 (9th Cir. Aug. 22, 2016).

[2] Robert Iafolla, U.S. Appeals Court Strikes Down Ernst & Young Class Action Waiver, Reuters (Aug. 22, 2016) http://www.reuters.com/article/us-usa-employment-classaction-idUSKCN10X20U.

[3] Morris, 2016 WL 4433080, at *1.

[4] Id. at 1.

[5] Id. at 11.

[6] 29 U.S.C. § 157 (2012).

[7] Id. § 158.

[8] Morris, 2016 WL 4433080, at *5.

[9] Id. at 11 (Judge Ikuta, dissenting).

[10] Id. at 12 (citing 9 U.S.C. § 2).

[11] Id. at 7.

[12] Id. at 6.

[13] See Iafolla, supra note 2.

[14] Lewis v. Epic Sys. Corp., 823 F.3d 1147, 1155 (7th Cir. 2016).

[15] See Benjamin Kim & Christine de Bretteville, Ninth Circuit Strikes Down Class Action Waivers in Employment Arbitration Agreements, The Nat’l L. Rev. (Aug. 30, 2016), http://www.natlawreview.com/article/ninth-circuit-strikes-down-class-action-waivers-employment-arbitration-agreements.


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