California Court Holds Class Action Waiver Violates Federal Law

Class Action WaiverA new federal class action waiver decision could have major ramifications for arbitration agreements. The opinion in Morris v. Ernst & Young declares that arbitration agreements violate the National Labor Relations Act (NLRA) if they require employees to arbitrate separately.

The Forbidden Class Action Waiver

The arbitration agreement at the heart of the case stated that employees of Ernst & Young were required to pursue any legal claims against their employer through arbitration, and that they could arbitrate only as individuals in “separate proceedings.” The employees were required to sign these class action waiver agreements as conditions of employment.

An Ernst & Young employee named Stephen Morris filed a class action against his employer, in spite of the class action waiver arbitration agreement. He alleged that the company had misclassified him, and denied him overtime wages. When Ernst & Young filed a motion to compel arbitration, Morris (and another plaintiff named Kelly McDaniel) argued that the arbitration agreement’s requirement that proceedings take place separately violated the NLRA.

The case made its way to the U.S. District Court for the Northern District of California. The Court found that the clause against separate proceedings violates the “essential, substantive right” of the NLRA – the right of employees to pursue work-related legal claims together. The Court ruled that the waiver in Ernst & Young’s arbitration agreements dealing with separate proceedings is unenforceable.

The Rationale for the Class Action Waiver Decision

The Court pointed to Sections 7 and 8 of the NLRA. Section 7 states that employees have a right to join labor organizations, bargain collectively, and “to engage in other concerted activities for the purpose of collective bargaining, or other mutual aid or protection.” The Court held that the right to engage in concerted activities, as laid out in Section 7, is the NLRA’s primary substantive provision.

Section 8 bars efforts by employers to interfere with the rights guaranteed by Section 7. According to the court, an employer violates Section 8 by including a waiver in an arbitration agreement that prevents concerted activities by employees – and it violates Section 8 a second time if it requires employees to sign such an arbitration agreement as a condition of employment.

The Court highlighted the distinction between procedural rights and substantive rights. One of the differences between procedural rights and substantive rights is that substantive rights cannot be waived in arbitration agreements. According to the ruling, the right of employees to pursue their claims together is a substantive right – and thus the Federal Arbitration Act does not require the “separate proceedings” waiver in the arbitration agreement to be enforced.

The Effect of the Ruling

The U.S. District Court for the Northern District of California has jurisdiction over Alameda, Contra Costa, Del Norte, Humboldt, Lake, Marin, Mendocino, Monterey, Napa, San Benito, San Francisco, San Mateo, Santa Clara, Santa Cruz and Sonoma Counties. If you operate a business in one of these counties, and you have been requiring your employers to sign arbitration agreements that contain a “separate proceedings” waiver, it may be time to speak to an attorney.

The employment and labor law attorneys at Beck Law P.C. in Santa Rosa are available for consultation. You can call or email their office today to schedule an appointment.



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