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New California Judicial Opinion Negates Class-action Waiver Clauses In Employment Contracts

california-judicial-opinion-class-action-waivers-employment-contracts.pngIn Morris v. Ernst & Young, the Ninth Circuit Court of Appeals recently weighed in on the national debate on class-action waivers in employment contracts. Most potential defendants - including employers - will do almost anything to avoid facing class-action lawsuits, simply because the damage awards are so high. For example, two former Wells Fargo employees just filed a class-action lawsuit in California that demands a whopping $2.6 billion in damages; the lawsuit involves allegedly unrealistic sales quotas.

Facts and Procedural History

Two former employees at the accounting firm filed a class-action misclassification lawsuit in a New York federal court, claiming that they should have been hourly employees who were eligible for overtime payments. After the case was transferred to the Northern District of California, Ernst & Young filed papers to get the class action dismissed and the case moved to arbitration, citing an anti-collective action clause in the plaintiffs' employment contracts. In the "concerted action waiver," employees agreed to bring employment law cases individually and to waive jury trials by submitting them to arbitration.

The trial judge agreed with Ernst & Young and dismissed the class-action lawsuit. Later, after a three-judge panel reversed on a technicality, the matter landed before the full Court of Appeals.

The NLRB's Decision

The National Labor Relations Board (NLRB) has consistently held that these class-action waivers run contrary to the National Labor Relations Act. It reasons that any restriction on collective action is essentially a restriction on workers' rights "to join together to pursue workplace grievances." After analysis, the Morris court concluded that the NLRB's stance was consistent with Congress' interpretation and did not run afoul of the Federal Arbitration Act (FAA), which basically encourages litigants to settle disputes through arbitration or some other form of alternative dispute resolution if at all possible.

Moreover, according to the court, the FAA may not even apply, because a jury trial is a substantive right as opposed to a procedural one and it is illegal to require waiver of substantive rights. In fact, according to the majority, the clause would be illegal if it mandated that employment disputes be resolved "only [by] courts, or only rolls of the dice or tarot cards." Finally, with a bit of contempt, the court concluded that a litigant cannot simply "incant the acronym 'FAA' and receive protection for illegal contract terms."


The Ninth Circuit's decision in Morris has deepened the circuit split on this issue. The Seventh Circuit, based in Chicago, had reached a similar result in a similar dispute. However, the Fifth Circuit, based in New Orleans, has consistently sided with employers and against either workers or the NLRB.

A split in the circuits is one of the few instances that the United States Supreme Court intervenes in an issue to resolve the split. Ernst & Young may appeal Morris to the High Court and take its chances in that forum; on the other end of the scale, most observers expect the NLRB to wait until the Supreme Court is back at full strength before it takes the class-action arbitration issue to the next level.

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