Recent Cases Signal Shifting Tides in Employment Arbitration

Many employers enter into arbitration agreements with their employees to expedite resolution and mitigate the risk of jury trials. For the most part, a proper arbitration agreement would have the effect of requiring both the employee and employer to resolve most of their disputes within the confines of a private arbitration.

Last year, the California Supreme Court decided in the Iskanian decision that “PAGA” claims could not be waived in an employment arbitration agreement. “PAGA” stands for the Private Attorney General’s Act, which is a law that permits employees to bring an action on behalf of a group of employees who believe their employer has violated certain employment laws. PAGA actions are somewhat similar to class actions, but have their own set of procedural rules and are generally more limited in scope and remedies. As a result of Iskanian, some claims (such as individual claims for wrongful termination) were subject to arbitration, while PAGA claims were required to be litigated in court, creating a bit of chaos for the litigants. However, although the court in Iskanian held that PAGA waivers in arbitration agreements were illegal, the court held that class action waivers were valid.

Recently, the Ninth Circuit (the federal appeals court which covers a territory including California) flatly disagreed with the California Supreme Court, ruling in Morris v. Ernst & Young, LLP that requiring employees to sign an arbitration agreement precluding them from bringing, in any forum, a class action regarding wages, hours, and terms and conditions of employment violates the National Labor Relations Act (NLRA)

Section 7 of the NLRA allows employees to collectively “seek to improve working conditions through resort to administrative and judicial forums.” Under Section 8 of the NLRA, an employer may not defeat that right by requiring employees to pursue their work-related legal claims individually. The Ninth Circuit considered those parts of the NLRA together and ruled that a class action is concerted activity—the right of employees to act together—and is an essential, substantive right established by the NLRA. The Ninth Circuit further held that an employer unlawfully interferes with that right by requiring its employees to resolve their legal claims in “separate proceedings.” Accordingly, the class action waiver was found to violate the NLRA and therefore was unenforceable.

The Ninth Circuit went out of its way to explain that its conclusion about the illegality of the class action waiver here had nothing to do with a requirement to use arbitration as a forum, stating, “It would equally violate the NLRA for Ernst & Young to require its employees to sign a contract requiring the resolution of all work-related disputes in court and in ‘separate proceedings.’”

In another recent case, Esparza v. Sand & Sea, Inc., the California Court of Appeal considered the issue of whether an arbitration provision in an employee handbook is legally enforceable. In this case, the company employee handbook contained the arbitration provision. There was no separate arbitration agreement between employer and employee. The employer relied on the handbook provision to try to enforce arbitration and move the action out of court.

In determining whether the arbitration provision in the handbook was sufficient to form an enforceable arbitration agreement, the court was mindful that arbitration is a creature of contract. Therefore, the court looked at whether anything about the handbook made it clear that the employee and employer had mutually agreed to arbitration.

Because the policy itself was not the “agreement,” the court focused on a welcome letter at the beginning of the handbook, which stated, “[T]his handbook is not intended to be a contract (express or implied), nor is it intended to otherwise create any legally enforceable obligations on the part of the Company or its employees.” The court also focused on the handbook acknowledgment form that mentioned the arbitration provision as one of the “policies, practices, and procedures” of the company, but did not state that the employee agreed to the arbitration provision, and instead expressly recognized that the employee had not read the handbook at the time the acknowledgment form was signed.

Ultimately, based on these facts, the court concluded that the handbook arbitration provision alone did not create an enforceable agreement to arbitrate and there was therefore no basis to compel the parties to arbitration.

Finally, just last week, the Ninth Circuit issued a new ruling in Mohamed v. Uber Technologies, Inc. that seems to negate its earlier Morris decision. Specifically, in the Mohamed case, the court stated that employee can waive class actions in employment arbitration agreements. However, the reason for this was that the specific arbitration agreement involved in the Mohamed case provided employees with a thirty-day window to opt out of arbitration after signing the agreement. This option kept the agreements from being unconscionable and, according to the court, ensured that the class action waiver did not violate the NLRA.

The upshot of these cases is that employment arbitration is still an unresolved area of the law in many ways.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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