Can you prevent employees from pursuing class actions if you have the right employment agreement? Employment agreements routinely include arbitration clauses that require employees to waive their right to pursue work-related claims through collective or class actions. Instead, employees agree to resolve disputes through individual arbitration. But the validity of these arbitration clauses is unclear and is now before the United States Supreme Court. The Supreme Court heard oral argument earlier this week in National Labor Relations Board v. Murphy Oil, USA, Inc. and two other consolidated cases about whether such clauses violate the National Labor Relations Act (which governs employer-employee relations) or whether the Federal Arbitration Act (which governs arbitration agreements) trumps the NLRA.

The cases that the Supreme Court is reviewing come out of the Fifth, Seventh and Ninth Circuit Courts of Appeal. The Fifth Circuit held that an employer lawfully enforced an arbitration clause in its employment agreement and did not violate the NLRA. The Seventh and Ninth Circuits held the opposite—finding similar arbitration clauses unenforceable because the NLRA prohibits class waivers in employment agreements.

Employment contract arbitration clauses are currently enforceable in the Second, Fifth, and Eighth Circuits (shown in green below) and unenforceable in the Seventh and Ninth Circuits (shown in red below).

Murphy’s Law: Will the Supreme Court End Employment Contract Arbitration Clauses?

Why Murphy Oil Matters

The Supreme Court’s decision in Murphy Oil is worth watching. If the Supreme Court holds that these arbitration clauses do not violate the NLRA (or that the FAA overrides the NLRA), employees who have signed such clauses will be required to litigate employment-related disputes on an individual basis before an arbitrator. Conversely, if the Supreme Court finds that these clauses violate the NLRA, employees can pursue lawsuits on a collective or class basis, notwithstanding an employment agreement that purportedly waives such rights.

How Best to Structure Arbitration Clauses

Employers can likely avoid these issues entirely with careful drafting of their employment agreements. In particular, if an employment agreement gives an employee the opportunity to “opt out” of the agreement (thus making the agreement voluntary, not mandatory), an arbitration clause and class action waiver is likely enforceable. An opt-out clause should clearly inform the employee of their right to opt out of arbitration and also require the employee to affirmatively notify their employer of their desire to opt out. Ironically, allowing employees the option to resolve employment-related disputes in arbitration may help defend a later challenge to the enforceability of the arbitration agreement if the employee had the option to “opt out” but chose not to do so.

Wave Goodbye to Waivers? 6th Circuit Joins March to Prohibit Class Action Waivers in Arbitration AgreementsJoining two other circuit courts, the 6th Circuit concluded that employers cannot take advantage of class action and collective action waivers as part of employment arbitration agreements. In NLRB v. Alternative Entertainment, Inc., the divided court agreed with the National Labor Relations Board (NLRB) that prohibiting employees from pursuing class action litigation or collective action arbitration violated the National Labor Relations Act (NLRA). The 6th Circuit agreed with the 7th and 9th Circuits, which are at odds with the 5th and 8th Circuits on the class action waiver question. Based on the circuit split, the U.S. Supreme Court has agreed to take up the question and will ultimately decide whether class action and collective action waivers in employment arbitration agreements violate the NLRA.

The Facts of the Case

AEI was changing its field technicians’ compensation structure. James DeCommer felt the change would cause him to lose between $7,000 and $10,000 per year in compensation.  DeCommer complained about the compensation restructuring to his manager and company president, and also spoke with 10 or more other technicians who shared his frustration. Finally, DeCommer spoke with AEI’s CFO to express that he had talked with other employees and all had concluded they would lose “quite a bit of money” with the salary restructuring.

Two days after the conversation with the CFO, AEI fired DeCommer because the “relationship [was] not working out,” and DeCommer had said he would not perform certain home sales calls based on the new salary structure. DeCommer filed charges against AEI with the NLRB.

The case centered around two employment documents: (1) an arbitration agreement that stated that “[b]y signing this policy, you and AEI also agree that a claim may not be arbitrated as a class action, also called ‘representative’ or ‘collective’ actions, and that a claim may not otherwise be consolidated or joined with claims of others,” and (2) the employee handbook that prohibited unauthorized disclosure of confidential business information “including any compensation or employee salary information.”

An administrative law judge (ALJ) concluded that AEI’s mandatory arbitration policy (with its class action and collection waivers) prevented employees from taking concerted legal action as protected under the NLRA. The NLRB agreed with the ALJ.

The 6th Circuit’s Decision

The 6th Circuit agreed that the arbitration provision violated the NLRA in preventing concerted action. Two federal statutes came into play to evaluate whether the arbitration provision was enforceable: the Federal Arbitration Action and the NLRA.

The FAA sets forth that arbitration agreements are generally enforceable, and interpretive case law has consistently reflected the “liberal federal policy favoring arbitration agreements.” The FAA provides that arbitration agreements are as enforceable as any other contract, but, notably, the FAA does not make arbitration agreements more enforceable than other contracts which is commonly known as the “savings clause” in the FAA. For its part, the NLRA gives employees the right to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection” along with making it an unfair labor practice to “interfere with, restrain, or coerce employees in the exercise” of those rights. The court surmised that the two statutes were compatible because the FAA’s savings clause addressed the scenario presented: The NLRA makes AEI’s mandatory arbitration provision – that interferes with the right to engage in concerted activity – illegal on grounds that would be applicable to any other contract. In other words, “because any contract that attempts to undermine employees’ right to engage in concerted legal activity is unenforceable, an arbitration provision that attempts to eliminate employees’ right to engage in concerted legal activity is unenforceable.” According to the 6th Circuit, the NLRA makes clear that the right to concerted activity is a substantive right that is not subject to waiver.

Where Does It Go From Here?

Several other federal circuit courts have weighed in on this issue. The 9th and 7th Circuits agreed with the 6th Circuit that mandating individual arbitration violated the NLRA based on the savings clause. The 5th and 8th Circuits, on the other hand, have found that class and collective action waivers as part of arbitration agreements were enforceable and did not violate the NLRA. The AEI opinion took particular issue with the 5th Circuit’s view that the policy behind the FAA trumped the policy considerations behind the NLRA.

The AEI opinion included a partial dissent contending that the employer and employee contracted to do just what the FAA allowed in having disputes resolved in the efficient and cost-effective forum of arbitration and that arbitration provisions have been uniformly upheld. The dissent highlighted that neither the majority opinion nor NLRB confronted what would make class or collective litigation “concerted” in such a way that makes it a substantive right that could not be voluntarily waived by the employee.

So there is obvious dissension among the circuits on this question of class action waiver, and the U.S. Supreme Court agreed in January to resolve the circuit split with review of a related NLRB decision. For now, however, employers with these agreements under the 6th Circuit’s jurisdiction (Kentucky, Michigan, Ohio, and Tennessee) should evaluate their arbitration provisions and expect challenges. Employers with these types of agreements in the jurisdiction of the 5th Circuit (Louisiana, Mississippi, and Texas) and 8th Circuit (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota) are okay for now. Stay tuned for the Supreme Court’s final decision on the matter.