Enforcement of Arbitration Agreements in Employment Relationships
On October 2, 2017, the United States Supreme Court began its 2017-2018 term by hearing argument on whether arbitration clauses in employment agreements are enforceable waivers of a workers’ right to participate in a class action. (Epic Systems Corp. v. Lewis, Ernst & Young LLP, No. 16-285; National Labor Relations Board v. Murphy Oil USA, No. 16-307; Ernst & Young LLP v. Morris, No. 16-300.) We may expect the United States Supreme Court’s decision in early 2018.
The Fifth, Seventh and Ninth Circuit Court of Appeals were split on whether the waivers, which historically had enforced under the Federal Arbitration Act, violate the employees’ rights under the National Labor Relations Act (“NLRA”). Opponents of the waivers contend they violate the employees’ rights under the NLRA to organize by engaging in “concerted activities” in pursuit of their “mutual aid or protection”. The Ninth Circuit Court of Appeal held the right of employees to act together is an essential substantive right established by the NLRA and therefore, class action waivers in arbitration agreements are not enforceable. (Morris v. Ernst & Young, LLP (9th Circuit 2016) 834.F. 3d 975.)
The California Supreme Court decided a similar issue in Iskanian v. CLS Transportation Los Angeles (2014) 59 Cal.4th 348. In Iskanian, an employee who signed an arbitration agreement sought to bring a class action on behalf of himself and similarly situated employees for uncompensated overtime, meal and rest periods. While the Court held class action waivers do not necessarily violate the NLRA under then-existing law, the Court held a related waiver unenforceable: the right to bring a representative suit under the Private Attorneys General Act of 2004 (“PAGA,” Lab. Code § 2698, et seq.; a California statute which allows private persons to bring an action for civil penalties on behalf of the state against Labor Code violations committed against the employee and fellow employees, with most of the proceeds of that litigation going to the state). The Court reasoned that a waiver of the right to bring a representative PAGA claim is against public policy and the Federal Arbitration Act (9 U.S.C. § 1 et seq.; a federal statute described as embodying a “national policy” favoring arbitration) does not preempt the PAGA statute.
Enforcement of arbitration agreements in individual employee lawsuits can also be unclear. The primary case that provides guidance is Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th 83 (abrogated in part by AT&T Mobility, LLC v. Concepcion (2011) 563 U.S. 333.) In that case, the California Supreme Court explained that employment arbitration agreements may be enforceable to bar courthouse litigation of an employee’s claim of discrimination under the Fair Employment and Housing Act, if the arbitration provision permitted vindication of the employee’s statutory rights. In Armendariz, the arbitration agreement in question limited an employee’s damages to back-pay and precluded the employee from engaging in discovery rendering that particular arbitration agreement unenforceable.
We may expect case law to evolve regarding enforcement of arbitration agreements in the employment and consumer context. Gauging enforcement may be relative to what is enforceable “today.” The best measure to ensure future enforcement is to implement a procedure that fosters objective indicia the arbitration agreement was not presented to an employee on a “take-it-or-leave-it” basis. Also, the arbitration forum should be no more than an alternative to the courthouse form. Once the arbitration agreement provides terms that contradict with an employee’s substantive rights under California law, the arbitration agreement is less likely to be enforceable. Employers interested in preserving arbitration options should always consult with an attorney to review and draft their arbitration agreements.