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Recent decisions by the U.S. Courts of Appeals for the Seventh Circuit and the Ninth Circuit have adopted the reasoning of the National Labor Relations Board ("NLRB") in D.R. Horton, Inc. and Michael Cuda, in which the NLRB held that an employer violated the National Labor Relations Act ("NLRA") by requiring employees to execute arbitration agreements that contained a bar on collective or class actions. The recent Seventh and Ninth Circuit decisions, major victories for employees, break with the Fifth Circuit's holding in the appeal from the NLRB's decision in D.R. Horton, Inc. v. NLRB, and decisions by the Second and Eighth Circuits, all of which rejected that position. This well-defined circuit split serves as a clear invitation to the Supreme Court to resolve the irreconcilable stances taken by the Circuits.
The Seventh Circuit's decision in Lewis v. Epic Systems Corporation and the Ninth Circuit's decision in Morris et al. v. Ernst & Young LLP both hold that mandatory employee arbitration clauses that prohibit class and collective actions violate employees' rights under Sections 7 and 8 of the NLRA and are not enforceable under the Federal Arbitration Act ("FAA"). Section 7 guarantees employees' rights to act in concert "for their mutual aid or protection." 29 U.S.C. § 157. Section 8(a) states that it shall be an "unfair labor practice to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in [Section 7]." 29 U.S.C. § 158.
In Lewis, the Seventh Circuit determined that the arbitration agreement at issue, which stated that claims "will be arbitrated only on an individual basis" and that employees "waive the right to participate in or receive money or any other relief from any class, collective, or representative proceeding," clearly violated Sections 7 and 8(a). Similarly, in Morris, the Ninth Circuit determined that an arbitration agreement that required employees to bring claims in "separate proceedings" violated an employee's rights under the NLRA.
In direct opposition to the Fifth Circuit's holding in D.R. Horton, the Seventh and Ninth Circuits both found that the FAA, the 1925 law that provides for resolution of private disputes through binding arbitration, does not override an employee's Section 7 rights. Citing Section 2 of the FAA, 9 U.S.C. § 2, which states that an arbitration agreement "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," the Seventh and Ninth Circuits both determined that because a class action waiver provision conflicts with Sections 7 and 8(a) of the NLRA, such waivers are not enforceable under the FAA. Further, the Seventh and Ninth Circuits both concluded that the right to class or collective action is a substantive right, rather than a procedural one, that cannot be waived in an arbitration agreement.
The Supreme Court will likely weigh in on the enforceability of class action waivers in employment agreements. Until then, the Lewis and Morris decisions create ambiguity as to whether employers can lawfully require that disputes with employees be resolved through individual arbitration, and companies that have employees in a variety of locations will face different standards in different jurisdictions.
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