This week, the Ninth Circuit held that Ernst & Young’s (E&Y) arbitration agreement that prohibited its employees from filing class actions violates the National Labor Relations Act (NLRA). E&Y required as a condition of employment that its employees sign an agreement stating that they could not bring any class action or concerted claim regarding wages, hours, and terms and conditions of employment. Instead, an employee bringing those claims would arbitrate as single plaintiff.

Two former E&Y employees brought a class and collective action alleging that E&Y misclassified its workers to deny overtime under the Fair Labor Standards Act (FLSA). Pursuant to the employment agreement, a district court ordered individual arbitration of the claims and dismissed the case. The employees appealed claiming that the employment agreement’s waiver of collective actions violated numerous federal statutes, including the NLRA and the FLSA.

The Ninth Circuit found the arbitration agreement violated Sections 7 and 8 of the NLRA, which protect concerted employee activity to improve working conditions. It held that the requirement that all claims be individually arbitrated was an “interference” with the rights the NLRA guarantees. Specifically, the Court stated:

“Sections 7 and 8 make the terms of the concerted action waiver unenforceable. The ‘separate proceedings’ clause prevents concerted activity by employees in arbitration proceedings, and the requirement that employees only use arbitration prevents the initiation of concerted legal action anywhere else. The result:  interference with a protected Section 7 right in violation of Section 8. Thus, the ‘separate proceedings’ terms in the Ernst & Young contracts cannot be enforced.”

The opinion reconciles its decision with the Federal Arbitration Act by stating that the problem is not arbitration, but the prohibition on concerted legal claims. The dissent, by Judge Ikuta, took issue with this and pointed out that the United States Supreme Court has held that waiver of class actions is typical in the arbitration context because class procedures create a scheme that is inconsistent with the FAA. As noted by Judge Ikuta, arbitration provides benefits of speed and informality—neither of which would be accomplished by class or collective actions. The dissent cited numerous examples where Courts had held that arbitration requirements were not vacated by federal statutes.

Within the Ninth Circuit’s jurisdiction, this decision may cause some immediate heartburn for employers and they may need to consider revising agreements. As we have noted before, collective and class actions on overtime issues are juicy temptations for plaintiff lawyers. Under this decision, even if there is an arbitration agreement prohibiting such actions, we should expect employees to take advantage of this new avenue for such claims.