Labor & Employment Law Update

The Ninth Circuit has warned employers that introducing a mandatory arbitration agreement during active class litigation, particularly when done through poor or misleading communication, can invalidate the agreement entirely.

In Avery v. TEKsystems, decided January 28, 2026, the court affirmed a district court order refusing to enforce an arbitration policy introduced late in the lawsuit.

The court found that the communications used to roll it out were misleading, one-sided, and fundamentally subverted the class action process.

TEKsystems’s Arbitration Agreement Rollout

In 2022, four recruiters sued TEKsystems, an IT staffing agency, alleging misclassification as over-time exempt under California law. After more than a year of discovery, with class certification briefing complete, TEK rolled out a new mandatory arbitration agreement targeting the very employees seeking to certify the class. The rollout consisted of two emails sent out during the last two weeks of December.

The first email, sent companywide, promoted arbitration as efficient while disparaging class actions as wasteful proceedings that only serve to enrich attorneys, making no mention of the standard contingency-based fee structure or the rarity of plaintiffs having to front any attorney fees at all. Hours later, a second email was sent to potential class members, informing them of the pending lawsuit and presenting each employee a choice: sign a form to opt out of the arbitration agreement and remain in the potential class, or do nothing and be automatically bound to arbitration (effectively excluding them from the class).

The arbitration agreement included a class action waiver, so anyone who did nothing (thereby becoming bound to that agreement) would be required to process any claims in individual arbitration and would be considered (by the employer) to be excluded from the class. In practice, the employer’s method completely flipped the class action process outlined in Federal Rules of Civil Procedure 23—under which class action members are considered in the class, unless they take affirmative steps to opt out. Here, inaction meant exclusion.

The emails also warned employees that class action lawyers charge “exorbitant fees,” omitted any mention that employees were able to consult with plaintiffs’ counsel for free, and gave conflicting deadlines. One hundred twenty-three employees did nothing, and under the new arbitration agreement, the employer argued they were bound to arbitration and excluded from the pending class action lawsuit.

Employee Communications Matter: Ninth Circuit Rejects Arbitration Agreement

A unanimous panel of the Ninth Circuit Court of Appeals affirmed the district court’s refusal to enforce the arbitration agreements on three grounds.

1. Rule 23(d)’s broad authority to oversee class actions includes the power to invalidate arbitration agreements when a party’s conduct threatens the fairness of litigation.
2. TEK’s communications were independently defective—misleading, disparaging, and designed to discourage class participation.
3. The delegation clause in the agreement (requiring the arbitrator to decide issue of enforceability of the agreement and arbitrability of claims, etc.) did not shield it from judicial review because plaintiffs challenged the validity of the entire agreement, meaning that the judge—not an arbitrator—had to resolve that challenge first.

However loathe federal courts may be to police the arbitration process, they have broad authority to protect the fairness of class action procedures.

How to Introduce Arbitration Policies Without Triggering Legal Challenges

• Implement arbitration well in advance of litigation. Timing was central to the court’s analysis. Agreements rolled out as a litigation tactic—rather than as ordinary business practice—will face heightened scrutiny.
• Communicate accurately and evenhandedly. Disparaging class actions, omitting material information, or discouraging employees from seeking independent legal advice are red flags that courts will act on.
• Never make inaction a trap. Structuring a rollout so that doing nothing automatically excludes employees from a pending class action inverts Rule 23’s opt-out framework and will not survive judicial review.
• Avoid pushing major policy changes mid-holiday season. Perhaps this is merely salt in the wound in this case, but the December timing of TEK’s emails was specifically flagged as a factor that undermined employees’ ability to make informed decisions. Alone, it may not have been dispositive, but better to err on the side of caution.