Employment Law

Ninth Circuit Sides With NLRB on Class Waivers

Why it matters

Siding with the National Labor Relations Board (NLRB), the Ninth Circuit Court of Appeals pushed the question of whether it violates the National Labor Relations Act (NLRA) to require employees to sign agreements precluding them from bringing concerted legal claims in any forum one step closer to the U.S. Supreme Court. In D.R. Horton and subsequent cases, the NLRB took the position that employers run afoul of the NLRA by eliminating workers' ability to band together to bring legal action. However, the federal appellate courts have split on the issue. The Second, Fifth, and Eighth Circuits disagreed with the Board while the Seventh Circuit sided with the NLRB earlier this year. Now the Ninth Circuit has broadened the split by joining with the Seventh Circuit in a case involving an employee at an accounting firm required to sign a concerted action waiver. The district court enforced the waiver but the federal appellate panel reversed, finding that Congress's intent in Section 7 of the NLRA was clear. "This case turns on a well-established principle: employees have the right to pursue work-related legal claims together," the court wrote. "Concerted activity—the right of employees to act together—is the essential substantive right established by the NLRA." A dissenting judge said the majority's opinion was "breathtaking in its scope and in its error," as well as "directly contrary to Supreme Court precedent." The Supreme Court will be forced to decide the issue sooner or later and with the deepening split, the real question is when the Justices will hear it.

Detailed discussion

As a condition of his employment at accounting firm Ernst & Young, Stephen Morris was required to sign an agreement not to join with other employees in bringing legal claims against the company. The concerted action waiver required employees to pursue legal claims against Ernst & Young exclusively through arbitration and arbitrate only as individuals and in "separate proceedings."

Disregarding the agreement, Morris filed a class and collective action against Ernst & Young in New York federal court, alleging violations of California state law as well as the Fair Labor Standards Act. The case was later transferred to California federal court and joined with a similar action filed by Kelly McDaniel.

The employer moved to enforce the agreement and a district court ordered individual arbitration, dismissing the suits. Morris and McDaniel appealed to the Ninth Circuit Court of Appeals, arguing that the agreements violated the National Labor Relations Act (NLRA) and could not be enforced. For support, they cited the National Labor Relations Board's (NLRB) line of cases beginning with D.R. Horton, where the Board held that concerted action waivers violate the NLRA.

The majority of a Ninth Circuit panel agreed.

Defining the scope of NLRA rights is a task assigned to the NLRB, the court said, attaching considerable deference to its interpretation of the statute and reviewing the Board's position to see whether Congress has spoken to the precise question at issue.

The NLRB made clear in D.R. Horton that "employees must be able to initiate a work-related legal claim together in some forum, whether in court, in arbitration, or somewhere else," Circuit Chief Judge Sidney R. Thomas wrote, finding that this decision accorded with the legislature's position. "The intent of Congress is clear from the statute and is consistent with the Board's interpretation."

"Section 7 protects a range of concerted employee activity, including the right to 'seek to improve working conditions through resort to administrative and judicial forums,' " the majority said. "Concerted action is the basic tenet of federal labor policy, and has formed the core of every significant federal labor statute leading up to the NLRA."

Preventing the exercise of a Section 7 right "strikes us as 'interference' within the meaning of Section 8," the court added. "Thus, the Board's determination that a concerted action waiver violates Section 8 is no surprise. And an employer violates Section 8 a second time by conditioning employment on signing a concerted action waiver."

Applying these principles to the Ernst & Young agreement, the court said the "separate proceedings" clause is the "very antithesis" of Section 7's substantive right to pursue concerted work-related legal claims. "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 majority wrote. "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 Federal Arbitration Act (FAA) did not dictate a contrary result, the court said, because the NLRA obstacle is a ban on concerted legal claims—not a ban on arbitration. "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,' " the Ninth Circuit said. "The problem with the contract at issue is not that it requires arbitration; it is that the contract term defeats a substantive federal right to pursue concerted work-related legal claims."

Crucial to this result was the court's distinction that the right to concerted activity is a substantive right established by the NLRA, not a procedural one, meaning it cannot be waived. This distinction allowed the court to distinguish case law enforcing arbitration agreements under the FAA. "At its heart, this is a labor law case, not an arbitration case," the majority emphasized. "The contract here would face the same NLRA troubles if Ernst & Young required its employees to use only courts, or only rolls of the dice or tarot cards, to resolve workplace disputes—so long as the exclusive forum provision is coupled with a restriction on concerted activity in that forum."

The court acknowledged the split in the federal circuits but said it agreed with the Seventh Circuit, "the only one that 'has engaged substantively with the relevant arguments,' " as opposed to the Second, Fifth, and Eighth Circuits. Vacating the district court's order, the panel remanded the case for a determination of whether the "separate proceedings" clause is severable from the contract.

One judge dissented from the opinion, writing that the majority failed to follow the FAA's command to enforce arbitration agreements according to their terms and "effectively cripples the ability of employers and employees to enter into binding agreements to arbitrate."

Neither Section 7 nor Section 8 specifies the right to take legal action at all, whether individually or collectively, Judge Sandra Ikuta wrote, and while "the NLRA protects concerted activity, it does not give employees an unwaivable right to proceed as a group to arbitrate or litigate disputes."

In a legal context, "concerted" activity could include "joint legal strategies, shared arguments and resources, hiring the same attorneys, or even requesting the Department of Labor to bring an independent action against the employer," the dissent added. "But the language does not expressly preserve any right for employees to use a specific procedural mechanism to litigate or arbitrate disputes collectively; even less does it create an unwaivable right to such mechanism."

To read the opinion in Morris v. Ernst & Young LLP, click here.

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Arbitration Agreement Not Binding, California Appellate Panel Affirms

Why it matters

A California appellate court recently provided employers with a lesson in how not to structure an arbitration agreement in an employee handbook. January Esparza was given a handbook when she began working at Sand & Sea, Inc., that contained an arbitration provision. The handbook featured a welcome letter on the first page that 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." Although Esparza signed a form acknowledging she received the handbook that referenced the arbitration provision, the form did not state that she agreed to the arbitration provision and recognized that she had not read the handbook when she signed the form. Under these circumstances, the court found the arbitration provision did not create an enforceable agreement to arbitrate, affirming denial of the employer's motion to compel arbitration.

Detailed discussion

January Esparza began working at Shore Hotel, owned by Sand & Sea, Inc., in November 2012. On her first day of work, Esparza was given an employee handbook. The first page contained a welcome letter that included the statement: "Employees should understand, however, that this 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."

Pages three and four of the handbook included a section titled "Agreement to Arbitrate." Unlike the rest of the handbook, this section was printed all in capital letters and written in the first person from the employee's perspective.

The last two pages of the 52-page handbook consisted of identical copies of a policy acknowledgment, one labeled for the employee to keep and the other to give to the employer. Among other statements, the policy acknowledgment said: "Neither this manual nor its contents constitute, in whole or in part, either an express or implied contract of employment with Shore Hotel or any employee."

In addition, the acknowledgment form stated: "I also acknowledge that I am expected to have read the Employee Handbook in its entirety no longer than one week after receiving it." Esparza signed the acknowledgment form on her first day of work.

Her employment ended the following August, and in 2014, she filed suit against Shore Hotel alleging sexual harassment, sex discrimination, wrongful termination, and intentional infliction of emotional distress. The defendant moved to compel arbitration, relying on the agreement.

Esparza objected, arguing that her signature on the acknowledgment form was not an assent to arbitration but simply indicated that she was to have read the handbook within a week. The hotel countered that because Esparza had a week to review the handbook, she had the opportunity to accept employment subject to the handbook terms or seek employment elsewhere.

The appellate court disagreed. "There is a strong public policy favoring contractual arbitration, but that policy does not extend to parties who have not agreed to arbitrate," the court wrote, ruling that the employee handbook did not create a mutual agreement to arbitrate.

To begin with, the handbook itself indicated to the reader that it was not intended to establish an agreement, explicitly stating in the welcome letter that "this handbook is not intended to be a contract." "This statement undermines defendants' argument that the handbook and its arbitration provision actually were intended to create a legally enforceable obligation to arbitrate," the panel said.

The defendants' argument that the welcome letter language was intended to clarify that the handbook did not create an employment contract did not persuade the court. "[T]he language of the welcome letter was extremely broad, stating that the handbook 'is not intended to … create any legally enforceable obligations.' Defendants now ask us to find that the arbitration provision did create a legally enforceable obligation, despite the express language to the contrary. We decline to do so."

"Here, the reasonable interpretation of the welcome letter is that it meant exactly what it said—that the handbook was not intended to create 'any legally enforceable obligation,' including a legally enforceable obligation to arbitrate," the court said.

Further, the policy acknowledgment form was "merely informational," and explicitly recognized that Esparza had not yet read the handbook. "We have no basis to assume that Esparza agreed to be bound by something she had not read," the panel wrote, refusing to accept the employer's contention that her continued work for the company signaled her implied assent.

"[T]he welcome letter declared that the handbook did not 'create any legally enforceable obligations,' the policy acknowledgement said the handbook provided 'general information' about employer policies, and there was no stated requirement that the employee agree to any of these policies," the court wrote. "These facts do not support a conclusion that the parties mutually assented to be bound by the arbitration provision in the handbook."

To read the decision in Esparza v. Sand & Sea, Inc., click here.

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Judge Puts the Brakes on Uber's $100M Settlement

Why it matters

The parties in the putative class action alleging that Uber drivers are employees and not independent contractors are back to square one after the judge overseeing the litigation refused to sign off on the proposed $100 million settlement. Just prior to trial, the parties reached a deal that would allow Uber to continue to classify drivers in California and Massachusetts as independent contractors. In return, the estimated 385,000 class members would receive a payout of $84 million, plus an additional $16 million if an IPO for the ride-sharing company moves forward, as well as policy changes such as clarification about when a driver can be deactivated. But the court was not impressed. The $16 million add-on payment was illusory, the court said, finding the $84 million insufficient as it represented just 10 percent of the full value of the non-Private Attorneys General Act (PAGA) claims, which the court estimated at around $854.4 million. In addition, the drivers agreed to waive their PAGA claims in the agreement, which posed a host of policy problems, the court explained, and the other nonmonetary relief was modest, at best. The rejection of the proposed settlement agreement leaves the parties facing trial, a risky proposition for both sides.

Detailed discussion

As ride-sharing companies like Lyft and Uber have skyrocketed in popularity in recent years, the companies have faced significant litigation across the country, particularly on the issue of whether drivers are employees or independent contractors.

Both companies tried to settle the lawsuits. Lyft agreed to make changes to its terms of service to provide drivers with greater protections and pay $12.25 million but refused to alter the classification of drivers to employees going forward.

Uber tried a similar approach, albeit on a larger scale. Earlier this year, the company reached a deal with drivers in California and Massachusetts just before trial was set to begin. The approximately 385,000 drivers in the two states were to receive portions of an $84 million settlement fund that could be bumped up to $100 million if the company holds an IPO and the average valuation of the company increases to one and a half times that of its last financing round, $62.5 million as of December 2015.

Awards would be based on the number of miles driven, with additional weight given to those drivers that opted out of arbitration agreements with the company. For example, if all of the 243,320 California drivers filed claims, the 122,297 drivers who drove between 0-750 miles would receive an average distribution of $24, with the 42,074 drivers who drove between 750-2,000 miles receiving an average of $89, and the 7,534 drivers who drove more than 25,000 miles would receive an average of $1,950.

The agreement also included changes to policy, including more details about how and why drivers are "deactivated" from the service and clarification on Uber's tipping policy. The company additionally promised to help drivers with the creation of a drivers' association in both states. Most significantly, Uber would not change its business model, and drivers would continue to be classified as independent contractors.

But U.S. District Court Judge Edward M. Chen declined to grant judicial approval. "While recognizing sizable settlement sum and policy changes proposed by the Settlement Agreement and the significant risk that drivers face in pursuing this litigation … the Court concludes that the Settlement as a whole is not fair, adequate, and reasonable," he wrote.

The court acknowledged the risks to both sides in denying his approval (such as the uncertain outcome of a jury trial and the issue of the validity of arbitration provisions pending before the Ninth Circuit Court of Appeals) but expressed concern about all aspects of the settlement, from the monetary recovery to the policy changes to the breadth of the claims released by the drivers.

Considering only the $84 million (because "there is no information on the likelihood that [the $16 million] contingency will be triggered"), the court said it constituted roughly 10 percent of the full verdict value of the non-Private Attorneys General Act (PAGA) claims, which he valued at $854.4 million—a "substantial discount" of 90 percent.

As for the policy changes, "much of this non-monetary relief is not as valuable as the parties suggest, limiting their worth in considering the amount being offered in settlement," Judge Chen wrote. Unconvinced that changes to the tipping policy would result in substantially increased income for drivers as suggested, he noted the deactivation policy still allowed Uber to log drivers out based on low star ratings.

He also expressed concern about the "eleventh hour" settlement that "fold[ed] in new claims and class members at the expense of litigation pending in other courts, while attributing almost no value to those claims, in order to induce Uber to settle the cases at bar," as well as numerous objections to the deal, even at the preliminary stage of the proceedings.

The final straw for the court: the inclusion of a waiver of PAGA claims as part of the settlement, a change that altered "the Court's assessment of the fairness and adequacy of the settlement as a whole." The plaintiffs proposed to formally add a PAGA claim to the suit and settle it for $1 million—despite having previously argued that the claim could result in penalties over $1 billion, an amount the state's Labor and Workforce Development Agency agreed with.

"This $1 billion amount makes up more than half of the total verdict value of the case," the court said. "Plaintiffs propose settling the PAGA claim for 0.1% of its estimated full worth." While noting that such a huge verdict would likely be reduced, the court said the parties provided no rationale for allocating $1 million to the PAGA claim that "justifies settling the PAGA claim for such a relatively meager value."

"It is important to note that where plaintiffs bring a PAGA representative claim, they take on a special responsibility to their fellow aggrieved workers who are effectively bound by any judgment," Judge Chen said. "[W]here, as here, the compensation to the class amounts is relatively modest when compared to the verdict value, the non-monetary relief is of limited benefit to the class, and the settlement does nothing to clarify the status of drivers as employees versus independent contractors, the settlement of the non-PAGA claims does not substantially vindicate PAGA. In these circumstances, the adequacy of the settlement as a whole turns in large part on whether the PAGA aspect of the settlement can stand on its own."

The 99.9 percent reduction did not adequately reflect the parties' risks, the court said, particularly considering the PAGA claim would not be subject to the arbitration risk that justified in part the 90 percent discount in the verdict value of the non-PAGA claims.

"Plaintiffs appear to treat the PAGA claim simply as a bargaining chip in obtaining a global settlement for Uber's benefit, even though the PAGA claim alone is worth more than half of the full verdict value of all claims being released," the court wrote. "Even if the PAGA claim were not separately scrutinized, viewing all the claims combined (PAGA and non-PAGA), the Settlement Agreement yields less than 5% of the total verdict value of all claims being released."

To read the order in O'Connor v. Uber Technologies, Inc., click here.

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Jury Should Decide Validity of Mental Fitness Exam Request

Why it matters

Whether the employer's requirement that an employee undertake a mental fitness exam violated the Fair Employment and Housing Act (FEHA) should be decided by a jury, a California federal court has ruled. Several workers complained to the human resources department at a university about the behavior of a professor, alleging she engaged in a verbal altercation and inappropriate interactions with staff members. The HR director placed the professor on a paid suspension and ordered her to undergo a fitness for duty evaluation by the school's psychologist. When she refused, she was terminated and filed suit. Both parties moved for summary judgment and the court denied both. A fitness for duty exam is not simply an investigative tool in an employer's toolbox, the court wrote, and evidence must exist that a business necessity warrants a properly tailored fitness for duty evaluation. Concluding that facts were in dispute about exactly what the HR director knew at the time the exam was ordered, the court said the question of whether the exam was job-related and consistent with business necessity should be decided by a jury.

Detailed discussion

San Francisco State University hired Dr. Linda Ellis in 1987, employing her in its Museum Studies Program as a director and later a professor and senior curator at the museum. The lightly staffed program consists of just one other faculty member and one staff member.

In May 2014, several employees of the University sat down with the school's director of labor relations. Dr. Ellis did not attend the meeting, which lasted about an hour. By the end, the HR director recommended that the University direct Dr. Ellis to undergo a fitness for duty evaluation. The next day, two letters were sent to the professor.

One letter informed her that she had been placed on paid temporary suspension and directed her to undergo a fitness for duty evaluation. The second letter set forth the "strong and compelling evidence" that formed the basis for the suspension and exam. A number of items were listed, including a verbal altercation between Dr. Ellis and the other program faculty member, "unprofessional and inappropriate" interactions with staff members, and negative student feedback about Dr. Ellis.

The professor attempted to refute the allegations via e-mail but was told she needed to undergo the exam. She refused to attend the scheduled evaluation, and after she skipped a second exam, she was terminated. She filed suit in California federal court alleging the fitness for duty evaluation ordered by the University violated the Rehabilitation Act of 1972 and the California Fair Employment and Housing Act (FEHA).

Both parties moved for summary judgment. U.S. District Court Judge Thelton E. Henderson denied both.

The Rehabilitation Act and FEHA impose restrictions on employers requiring employees to undergo fitness for duty evaluations, mandating that the evaluation must be "shown to be job-related and consistent with business necessity." The question of whether the psychological fitness for duty evaluation Dr. Ellis was required to attend satisfied these requirements contained disputed questions of fact, the judge found.

Dr. Ellis argued that the request for an exam was based simply on a desire for expediency and convenience, not an actual business necessity, with the issues cited in the letter from HR minor problems that would necessitate routine performance counseling at most.

The University told the court that Dr. Ellis's effectiveness as a professor was undermined by her behavior and that the evaluation—an investigative tool to determine whether a reasonable accommodation is needed—was the only effective and fair means for the school to determine whether her behavior was due to a medical condition.

"The Court disagrees with Defendant as to the proper function of the fitness for duty examination," Judge Henderson wrote. "Ordering a fitness for duty evaluation is not merely an 'investigative tool' in the University's toolbox, to be wielded any time the University could use additional information about an employee. Rather, to protect employees from stigmatization and discrimination, the University must first have the requisite evidence that a business necessity warrants a properly tailored fitness for duty evaluation."

The key question for the court was: "What did [the HR director] know, and when did he know it?" With the material facts in dispute, the answer was for the jury, the judge said. A collection of e-mails (from students to the other faculty member, between staff members, and between Dr. Ellis and the other faculty member) "demonstrate that Dr. Ellis was engaging in unexpected outbursts and volatile interactions with her two coworkers, and that the behavior was seriously affecting her coworkers' ability to perform their jobs," the court said.

If the HR director was aware of those e-mails at the time he made his decision to order the evaluation, "such evidence would cause a reasonable person in [his] shoes to inquire whether Dr. Ellis was still capable of performing the essential functions of her position, even absent [the HR director] engaging in his own investigation."

However, it was not clear whether the HR director was aware of the e-mails at the meeting when he ordered the exam. "Therefore, it is the duty of the finder of fact, who is able to assess and weigh the credibility of evidence and testimony, to determine what information [the HR director] actually considered in recommending a fitness for duty evaluation for Dr. Ellis, and whether that information was reliable enough to constitute a business necessity," Judge Henderson concluded.

The question of job-relatedness similarly remained unanswered because the examination did not happen, leaving the court unable to determine whether the evaluation would have been tailored to Dr. Ellis's essential job functions.

To read the order in Ellis v. San Francisco State University, click here.

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