United States: Recent Decisions Clarify (Un)Enforceability Of Class Action Waivers In Employment Agreements

Companies looking to waive class action rights of employees may instead be waving goodbye to provisions in their employment contracts. Two recent decisions in California—one administrative and one in the 9th Circuit—recently found that class action waivers in employment contracts were unenforceable as a matter of law and public policy, resulting in the removal of entire or partial contractual provisions. A similar issue will soon be heard by the Supreme Court.

The more recent of the California decision was Buy-Low Market, Inc. v. Palacios, before the National Labor Relations Board (NLRB). The respondent in the case was Buy-Low Market, Inc., a company that operates grocery stores and which routinely inserted an arbitration clause into employment contracts. When a former employee, Nesked Palacios, brought a wage-and-hour class action against the grocery store operator, Buy-Low demanded that the claims be submitted to arbitration. However, NLRB Judge Amita Tracy found that the arbitration provision violated Section 8(a)(1) of the National Labor Relations Act, which prohibits interference with or restraint of employees' rights to organize and engage in concerted activities. The arbitration provision did not expressly reference the right to bring a class action, but Judge Tracy determined that in practice, it required employees to "relinquish any right they have to resolve such disputes through collective or class action." She noted that even where employee rights are not explicitly restrained, an agreement could still violate the National Labor Relations Act if "employees would reasonably construe the language to prohibit" the protected activity.

Buy-Low contended that the provision was not in fact mandatory, but the Board found that argument to be unavailing. Because the agreement was signed on the first day of employment and did not clarify whether the arbitration provision was mandatory or optional, the NLRB determined that "an employee would not likely refuse to sign." Moreover, according to the Board, the legality of such a provision under the National Labor Relations Act is not dependent on whether it was mandatory or voluntary. Given its findings, the NLRB ordered that Buy-Low cease and desist from enforcing the arbitration agreement, though did not rule as to the enforceability of an agreement as a whole.

This decision serves as a noteworthy contrast to one rendered in the 9th Circuit just days earlier, in which the Court of Appeals considered an arbitration clause with respect to unconscionability rather than the National Labor Relations Act. In that case, Poublon v. C.H. Robinson Co., an incentive bonus agreement mandated that employee claims be submitted to arbitration, but a judicial carve-out provision allowed for employer claims to be brought in court. The agreement explicitly prohibited class actions and also provided that if parts of the contract were found to be void, then they could be severed from the rest of the agreement.

Unlike the NLRB, the Poublon Court did not take issue with the fact that the employee allegedly felt she had to sign the agreement in order to keep her job. This argument was unpersuasive, according to the Court, because "there is no evidence in the record that C.H. Robinson ever stated or suggested that Poublon would be fired for failing to sign the agreement." Instead, C.H. Robinson had indicated that failure to sign would only affect Poublon's ability to collect her bonus, not to retain her job. Furthermore, the Court noted that even if Poublon had established that signing the contract was a condition of her employment, that would not be enough to prove unconscionability in the absence of another element of oppression or surprise in the agreement.

On the issue of the judicial carve-out, C.H. Robinson did not dispute the lower court's finding that such a provision was procedurally unconscionable. With respect to the class action waiver, the Appellate Court then, like the NLRB, determined that the class action waiver was unenforceable. Because the waiver prevented employees from bringing claims under the Private Attorneys General Act, the provision was "contrary to public policy and unenforceable as a matter of state law." However, the Court also noted that "contracts can be contrary to public policy but not unconscionable and vice versa." It found that while the provision was unenforceable under state law, it was not procedurally unconscionable, as arbitration clauses can generally waive collective, class-wide, and representative claims.

The Court then addressed the enforceability of a contract as a whole. Though Poublon argued that a contract with two illegal or unconscionable provisions should be rendered void in its entirety, the Court held that the two unenforceable provisions could be severed from the rest of the agreement. Because the provisions at issue were "collateral to the main purpose of the contract, which is to require arbitration of disputes," the provisions could be removed or limited without affecting the remainder of the agreement.  The Court came to this conclusion before even noting the severability clause, which made clear that "the parties intended for any invalid portion of the agreement to be restricted."

Together, these rulings make clear that class action waivers in employment agreements are subject to a high level of scrutiny, even if such waivers are not explicit and signing of the agreement was voluntary. This will be an issue to monitor going forward, as the Supreme Court granted certiorari on three similar cases in January: NLRB v. Murphy Oil USA, Inc. from the 5th Circuit, Epic Sys. Corp. v. Lewis from the 7th Circuit, and Morris v. Ernst & Young from the 9th Circuit. In hearing those consolidated actions, the Court will decide whether arbitration agreements preventing collective and class actions violate the National Labor Relations Act.

Recent Decisions Clarify (Un)Enforceability Of Class Action Waivers In Employment Agreements

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