The National Labor Relations Board (NLRB) recently held that requiring employees, as a condition of employment, to sign an arbitration agreement prohibiting them from filing collective or class actions for employment-related claims violates the National Labor Relations Act (NLRA). In its January 3, 2012 decision in D.R. Horton, Inc., the NLRB also held that its decision does not conflict with the Federal Arbitration Act (FAA) and distinguished AT&T Mobility v. Concepcion.
In a decision that applies to both unionized and non-unionized workforces, the NLRB recently held in D.R. Horton, Inc. that an employer violates the NLRA when it requires, as a condition of employment, covered employees to sign an arbitration agreement that precludes them from filing joint, class or collective actions asserting employment-related claims in court or before an arbitrator. In light of this decision, employers that require employees to sign agreements containing waivers of class and collective actions should:
Analyze whether their agreements are invalid under the NLRA.
Revise invalid agreements to comply with the NLRA.
On January 3, 2012, the NLRB issued a decision in D.R. Horton, Inc. The key litigated issue was whether an employer violates Section 8(a)(1) and (4) of the NLRA by requiring employees covered by the NLRA to sign, as a condition of employment, an agreement that precludes them from filing joint, class or collective actions asserting employment-related claims in court or before an arbitrator.
In January 2006, respondent D.R. Horton, Inc. (Horton) began to require all of its new and current employees to execute an arbitration agreement as a condition of their hiring or continued employment with Horton. The arbitration agreement provided that:
All employment-related disputes be resolved through individual arbitration.
The arbitrator would not have authority to:
consolidate claims of multiple employees;
fashion a proceeding as a class or collective action; or
award relief to employees on a group or class basis.
The employee waived his right to a judicial forum.
Michael Cuda (Cuda), the charging party, was employed by Horton at that time and signed the arbitration agreement as a condition of his continued employment. In 2008, Cuda's attorney notified Horton that he had been retained to represent Cuda and a nationwide class of similarly situated employees alleging that they had been misclassified as exempt (www.practicallaw.com/2-501-9885) under the Fair Labor Standards Act of 1938 (www.practicallaw.com/5-501-9884) (FLSA), and gave notice of intent to arbitrate. Horton's counsel responded, claiming that the notice of intent to arbitrate was ineffective based on the language in the arbitration agreement that barred arbitration of collective claims.
Cuda then filed an unfair labor practice (www.practicallaw.com/5-507-5808) (ULP) charge with the NLRB, and the NLRB's General Counsel issued a complaint alleging that Horton violated:
Section 8(a)(1) of the NLRA by maintaining the arbitration agreement provision that precluded employees from pursuing class or collective actions in an arbitration proceeding.
Section 8(a)(1) and (4) of the NLRA by maintaining the arbitration agreement provision requiring employees, as a condition of employment, to submit all employment-related claims and disputes to arbitration, and thus preventing them from going to the NLRB.
An NLRB administrative law judge (ALJ):
Dismissed the allegation that the prohibition against bringing class or collective actions violated Section 8(a)(1).
Held that the arbitration agreement violated Section 8(a)(4) and (1) because its language would lead employees to reasonably believe that they were prohibited from filing ULP charges with the NLRB.
Horton appealed the ALJ's decision to the five-member panel (Board) heading the NLRB's judicial functions.
In a 2-0 decision, a two member panel of the Board (Chairman Pearce and Member Becker, with Member Hayes recusing himself), the Board held that filing or joining a collective or class action asserting employment-related claims in court or before an arbitrator constitutes protected concerted activity (www.practicallaw.com/8-502-9594) under Section 7 of the NLRA. The NLRB further held that because the arbitration agreement at issue unlawfully restricted employees' ability to exercise these Section 7 rights (www.practicallaw.com/1-507-5768), it violated Sections 7 and 8(a)(1) of the NLRA. The Board also affirmed the ALJ's decision that the arbitration agreement violated Section 8(a)(4) of the NLRA because its language would lead employees to reasonably believe that they were prohibited from filing ULP charges with the NLRB.
The Board further held that there is no conflict between the NLRA and the Federal Arbitration Act (FAA) in this case, reasoning that:
The FAA prevents courts from treating arbitration agreements less favorably than other private contracts, but arbitration agreements remain subject to the same laws and rules about enforceability as other private contracts. Specifically, the Board explained that when arbitration agreements conflict with the NLRA, they must yield to the NLRA in the same way that other private contracts would yield to the NLRA.
Under Supreme Court precedent, the FAA only protects parties' rights to agree to arbitration if the parties can effectively vindicate their substantive statutory rights through arbitration. Because employees covered by the NLRA have a substantive statutory right to engage in concerted activity, including class and collective legal action, any waiver of their right to file or join collective or class actions asserting employment-related claims would interfere with their substantive statutory rights.
The Board further explained that even if there was a conflict between the NLRA and FAA, the policies under the NLRA and FAA would need to be accommodated to the greatest extent possible or the FAA would have to yield to the NLRA.
Throughout its decision, the Board distinguished seminal Supreme Court cases, including AT&T Mobility v. Concepcion, 14 Penn Plaza LLC v. Pyett and Gilmer v. Interstate/Johnson Lane Corp.
Notably, the Board's decision applies to employers covered by the NLRA, regardless of whether any portion of their workforce is unionized, but:
Does not preclude employers from requiring employees to arbitrate individual employment-related claims, where employees retain the right to pursue class or collective actions in court.
Only applies to employees who are covered by the NLRA. For example, it does not apply to supervisors or independent contractors.
Does not affect the right of unions to waive individual rights as part of the collective bargaining (www.practicallaw.com/4-382-3347) process.
In light of this decision, employers that maintain arbitration agreements with their employees should:
Analyze whether their agreements are invalid under the NLRA. For example, considering whether:
any employees who are party to the arbitration agreements are covered by the NLRA; and
the arbitration agreements preclude the employees from pursuing joint, collective or class actions.
the arbitration agreements do not include a carve-out allowing employees to file claims with the NLRB.
Revise invalid agreements to comply with the NLRA, for example, by requiring employees to arbitrate individual employment-related claims but allowing employees to pursue class or collective actions in court.
Employers also should analyze arbitration agreements for compliance with the NLRA before requiring new or existing employees to enter into them as a condition of employment.
This case has attracted considerable attention from pro-business groups, the plaintiffs' bar and unions. Amicus briefs were filed by 19 parties. An appeal or future challenge to this decision is possible.