Appeals Court Rules against EY on Mandatory Arbitration of Overtime Claims

A federal appeals court has ruled in favor of two Ernst & Young employees who wanted to participate in a class-action lawsuit against the firm about overtime pay rather than submit to mandatory arbitration.

The U.S. Court of Appeals for the Ninth Circuit handed down an opinion Monday in favor of EY employees Stephen Morris and Kelly McDaniel, vacating a district court’s order that would have compelled them to submit to individual arbitration of their claims. The class-action lawsuit they wished to participate in alleged that EY misclassified employees in order to deny them overtime wages, in violation of the Fair Labor Standards Act and California labor laws. An EY spokesperson did not immediately respond to a request for comment.

As a condition of their employment at EY, Morris and McDaniel were required to sign a mandatory arbitration clause agreeing not to join with other employees in bringing suit against the firm. According to the agreement, they were required to pursue any legal claims against EY exclusively through arbitration and only as individuals in “separate proceedings.”

Morris nevertheless sued EY in a class-action suit in New York, and McDaniel later joined the suit. They claimed EY had misclassified them and other employees to deny them overtime wages. The case was later transferred to the Northern District of California, where EY moved to compel individual arbitration according to the agreements signed by Morris and McDaniel. The district court sided with the firm, and the employees appealed the decision to the Ninth Circuit.

Chief Judge Sidney R. Thomas and another judge on the three-judge panel, Andrew D. Hurwitz, agreed with the employees, although the other judge, Sandra S. Ikuta, dissented. The majority held that EY “interfered with the employees’ right to engage in concerted activity under the National Labor Relations Act by requiring employees to resolve all of their legal claims in ‘separate proceedings.’ The panel concluded that ‘separate proceedings’ terms in the Ernst & Young contracts could not be enforced.”

The appeals court panel vacated the lower court’s order and remanded the case to the district court to determine whether the “separate proceedings” clause was severable from the employment contract. Judge Ikuta dissented, saying the majority’s opinion violated the Federal Arbitration Act’s command to enforce arbitration agreements according to their terms and contradicted a Supreme Court precedent. “This decision is breathtaking in its scope and error; it is directly contrary to Supreme Court precedent and joins the wrong side of a circuit split,” she wrote.

The majority of the panel, however, held that the Federal Arbitration Act did not dictate a contrary result.