If it is done correctly, an employer can require an employee to agree to waive his/her right to a jury trial and submit all employment-related disputes to binding arbitration as a condition of employment.  But can an arbitration clause also waive the employees’ right to bring or participate in a class action?

Employers (and those of us who practice employment defense) celebrated a not-so small victory  in June 2014 when the California Supreme Court held that an agreement to arbitrate and waive the  right to bring or be a part of a class action for employment-related claims is lawful.   Then the National Labor Relations Board (NLRB) pulled the dance-floor out from under us with its October 28, 2014 decision reaffirming its rule that an employer who, as a condition of employment, prohibits employees from participating in a class action violates the National Labor Relations Act (NLRA).  Now the enforceability of these clauses depends on whether the employee group is subject to the NLRA, as that federal law controls over California law where the NLRA applies.  The NLRB decision is not final, however, until appeals through the federal court of appeals and the Supreme Court are exhausted.

In 2007, the California Supreme Court held that most class action waivers are void and unenforceable by employers.[1]  Four years later the United States Supreme Court held  that that the Federal Arbitration Act (FAA) preempts state law on the subject and that such waivers are enforceable as a matter of federal law in consumer credit agreements.[2]  The question then became whether Concepcion would abrogate Gentry in employment cases where the applies.

In 2014 the California Supreme Court  held that the FAA indeed preempts California law in employment relationships that are subject to the FAA, and that class action waivers are enforceable in FAA-governed settings.[3]   In other words, an agreement to arbitrate and waive the  right to bring or be a part of a class action for claims including indemnification under the Labor Code or things like failure to pay minimum or overtime wages is lawful and likely not subject to other considerations.

Meanwhile the NLRB proceeded with its own rules on the subject.  In the 2012 D.R. Horton case,[4] the Board  held arbitration clauses that require class-action waivers violate the rights of employees to act collectively to improve their conditions under NLRA section 7.  Several federal circuit courts of appeals disagreed with D.R. Horton, so it became an open question whether the Board would stick with it.

The NLRB has now answered the question.  On October 28, 2014, the NLRB issued its decision in Murphy Oil USA, Inc.[5], and concluded that an employer who maintains or enforces “a mandatory arbitration agreement under which employees are compelled, as a condition of employment, to waive the right to maintain class or collective actions in all forums, whether arbitral or judicial” commits an unfair labor practice in violation of Section 8(a)(1) of the NLRA.

The Board starting off by noting that “[f]or almost 80 years, Federal labor law has protected the right of employees to pursue their work-related legal claims together, i.e., with one another, for the purpose of improving their working conditions.”  NLRA Section 7 provides to employees the right to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

The NLRB acknowledged that its D.R. Horton decision set forth nearly identical analysis as the Board’s decision in Murphy Oil and noted that several United States District Courts and the California Supreme Court disagree with D.R. Horton.  The Board dismissed those criticisms noting that its decisions “are reviewable solely in the Federal courts of appeals, and the district courts accordingly play a limited role in the interpretation and enforcement of the National Labor Relations Act” and similarly “State courts do not review the Board’s decisions and play no role in the administration of the Act.”[6]  It then rejected the analysis of three of those Courts of Appeals and reaffirmed D.R. Horton as the NLRB rule.

Tracking D.R. Horton, the Board determined that the right to engage in a collective or class action to improve working conditions is a substantive right, not merely one of procedure.  Since arbitration agreements that require a party to prospectively waive its right to pursue statutory remedies is invalid under the FAA, the Board reaffirmed that “arbitration agreements that [1] are imposed as a condition of employment, and [2] that compel NLRA-covered employees to pursue workplace claims against their employer individually, do require those employees to forfeit their substantive right to act collectively . . . .”[7]  Accordingly, the NLRA, in the Board’s view, “does create a right to pursue joint, class, or collective claims if and as available, with out the interference of an employer-imposed restraint.”[8]

THE LESSONS: WHAT DO EMPLOYERS DO NOW?

What does this mean for employers?  If employees are required to sign an arbitration agreement as a condition of employment that requires the employee to waive his or her right to bring or participate in a class or collective action, the agreement (or at least that provision) violates the NLRA.

For now, Murphy Oil is the governing rule and must be followed by employers that are subject to the NLRA.[9]    Unless and until the Ninth Circuit court of appeals or ultimately  United States Supreme Court addresses the issue (which will likely be a year or more down the road), California employers who are subject to the NLRA need to make a choice either (1) to condition employment on signing an arbitration agreement that does not include a class waiver provision; or (2) to  include a class waiver provision that is elective, as opposed to mandatory.  This could present a drafting challenge but it can be done if other requirements of drafting enforceable arbitration clauses are followed closely.

In creating, modifying or updating any arbitration agreement in light of Murphy Oil, employers should also remember that basic rules of enforceability apply and the agreement has to be written and structured properly.  A workable agreement includes the following at minimum (note: every situation is different and subject to its own requirements, so employment counsel needs to be consulted in all instances where an arbitration provision is being considered):

1.         The agreement needs to be mutual – employer and employee must both forfeit their rights to the judicial forum, including the right to jury trial,  for employment-related disputes;

2.         The arbitration agreement should be presented to employees as a separate, stand-alone agreement rather than as part of an employee handbook;

3.         The agreement should clearly state that the employer will bear all costs unique to arbitration, that the parties will be entitled to discovery, and that the arbitrator will issue a written opinion setting forth  findings of fact and conclusions of law  upon which the decision and award, if any, are based;

4.         The agreement should identify the process for selecting an arbitrator and also identify any limitations on who may serve as an arbitrator (e.g., the arbitrator must have a minimum of ten years experience, the arbitrator must have his or her place of business within a certain number of miles from where the employee works, etc.).[10]

There are advantages and disadvantages to arbitration.  One of the primary advantages is the opportunity to prevent or limit any employment-related class action.  While the Murphy Oil decision has created a daunting obstacle, it has not foreclosed the ability of employers to protect themselves from class actions through a well-crafted and properly presented arbitration agreement.