NLRB Pans Compensation Agreement Provision Requiring Arbitration of All Employment Disputes

Practical Law Legal Update 7-605-0165 (Approx. 9 pages)

NLRB Pans Compensation Agreement Provision Requiring Arbitration of All Employment Disputes

by Practical Law Labor & Employment

Background

The employer converted sales agents from independent contractors to employees. The employer required as a hiring condition that each nonunion commission sales employee sign a compensation schedule which included a commission schedule and the following provision:

All claims, disputes or controversies arising out of, or in relation to this document or Employee's employment with Company shall be decided by arbitration . . . Employee hereby agrees to arbitrate any such claims, disputes or controversies only in an individual capacity and not as a plaintiff or a class member in any purported class, collective action, or representative proceeding.

A former employee who had signed the compensation schedule document containing the arbitration provision filed a lawsuit in federal district court alleging FLSA violations on behalf of himself and others similarly situated. After the employer moved to dismiss the lawsuit and compel arbitration based on the arbitration provision in the compensation schedule, the employee filed a ULP charge.

An NLRB ALJ, relying primarily on stipulated facts and records, found that the employer violated Section 8(a)(1) of the NLRA by maintaining a mandatory binding arbitration policy that:

Restricted employees from engaging in protected activity or that employees would reasonably believe restricted their rights to engage in protected activity or bring ULP charges with the NLRB.
Required employees to exclusively arbitrate employment-related disputes on an individual basis and to waive their rights to bring class or collective actions.

The ALJ also found that the employer violated Section 8(a)(1) by filing a motion to dismiss the employee's FLSA collective action and compel arbitration. The ALJ acknowledged that the federal district court's order granting the employer's motions was informative but not precedential for NLRB ALJs, unlike D.R. Horton (357 N.L.R.B. slip op. 184 (Jan. 3, 2012); see Legal Updates, Mandatory Arbitration Agreement Prohibiting Class and Collective Actions Violates the NLRA: NLRB and FAA Trumps NLRA in D.R. Horton Class Action Waiver Challenge: Fifth Circuit; see also Article, Class Action Waivers in Employment Agreements: Expert Q&A with D.R. Horton's Counsel, Ron Chapman of Ogletree Deakins).

The employer filed exceptions to the ALJ's decision.

Outcome

The Board panel (Chairman Pearce and Members Johnson and McFerran) unanimously found that:

The arbitration provision, as written, violated Section 8(a)(1) of the NLRA because employees would reasonably believe that the broad language in the arbitration agreement restricted their rights to file an NLRB charge or access the Board's processes (U-Haul Co. of California, 347 N.L.R.B. 375, 377– 378 (2006); see also Murphy Oil USA, Inc., 361 N.L.R.B. slip op. 72 (Oct. 28, 2014)).
The ULP charge was not time-barred under Section 10(b) of the NLRA because the employer had maintained and enforced the offending arbitration provision throughout the six-month limitations period preceding the ULP charge (29 U.S.C. § 160(b)). It was irrelevant that the employee signed the document more than six months before he filed the ULP charge.
The charging party was an employee covered by the NLRA even though his employment ceased before he filed the ULP charge. The Board construes "employee" broadly (see Little Rock Crate & Basket Co., 227 N.L.R.B. 1406 (1977)).

A majority of the Board (Chairman Pearce and Member McFerran):

Applied Murphy Oil USA, Inc., which had reaffirmed D.R. Horton's principle that class and collective actions constituted concerted activities protected by the NLRA (Legal Update, NLRB Redoubles Stance that Mandatory Arbitration Clauses Waiving Employees' Rights to Pursue Class or Collective Actions Violate the NLRA).
Found that the arbitration provision unlawfully interfered with employees' Section 7 rights to participate in class or collective actions.
Ordered the employer to reimburse the former employee for any reasonable expenses and legal fees incurred in opposing the employer's motion to dismiss the FLSA action and compel arbitration based on Bill Johnson’s Restaurants v. NLRB (461 U.S. 731, 747 (1983)).

Member Johnson, in partial dissent, declined to join the majority's finding that the arbitration provision violated Section 8(a)(1) by precluding employees from pursuing class or collective actions. Member Johnson:

Relied on the reasons stated in his Murphy Oil dissenting opinion.
Did not reach the issues of whether:
- the former employee was engaged in protected, concerted activity when he individually filed the FLSA action in federal court; or
- the remedies that the majority ordered concerning reimbursement of fees and costs from the federal litigation were appropriate.

Practical Implications

The Board's decision in Cellular Sales of Missouri, LLC illustrates, that under U-Haul Co. of California and similar cases, the Board will hold that mandatory arbitration provisions, whether they are part of compensation schedules, other employment agreements, employee handbooks or stand-alone arbitration agreements, are unlawful if employees would understand them to foreclose participation in NLRB proceedings. It is irrelevant whether employees are represented by a union, as long as they are covered by the NLRA. Employers should consider incorporating disclaimers into arbitration provisions confirming that the provision does not preclude employees from participating in government agency proceedings, including NLRB proceedings.

As the Board majority continues to invalidate arbitration agreements with class or collective action waivers based on Murphy Oil, after the Fifth Circuit denied enforcement of D.R. Horton, it will be interesting to see how other courts of appeals evaluate the Board majority's interpretations of:

How the NLRA interacts with the Federal Arbitration Act.
Retaliatory litigation as a violation of the NLRA (see Legal Update, Motion for a TRO Within an Otherwise Non-frivolous Case can be the Basis of ULP for Retaliatory Litigation: NLRB).

The Board's order in this case imposes a remedy that is at odds with a traditional litigation principle that a prevailing party will not be required to pay the litigation fees and expenses of the losing party. Employers may need to adjust their labor and employment litigation cost-benefit analysis if this holding is sustained.

UPDATE

In Epic Systems Corp. v. Lewis, the US Supreme Court held that arbitration agreements with class and collective action waivers are not prohibited under Section 7 of the NLRA and must be enforced as written under the Federal Arbitration Act (FAA). The decision invalidates the NLRB's analysis in D.R. Horton and Murphy Oil on which this decision relies and therefore abrogates much of the analysis in this case (( (U.S. May 21, 2018); see Legal Update, SCOTUS: Arbitration Agreements with Class Action Waivers Must Be Enforced as Written, and NLRA Does Not Command Otherwise and Article, Expert Q&A on Class Action Waivers in the Employment Context.)

NLRB Pans Compensation Agreement Provision Requiring Arbitration of All Employment Disputes | Practical Law