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Employment Law & Litigation

Arbitration Agreements with Class Action Waivers Violate NLRA

Employers Cannot Eliminate an Employee’s Right to Sue Over Unfair Labor Practices by Arbitration Agreement

In D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344 (5th Cir. 2013), the National Labor Relations Board (NLRB) held that D.R. Horton, Inc. (Horton) had violated the National Labor Relations Act (NLRA) by requiring employees to sign an arbitration agreement that prohibited an employee from pursuing claims in a collective or class action. The United States Fifth Circuit Court of Appeals disagreed with the NLRB holding that the Mutual Arbitration Agreement did not violate the employee’s “right to access” under the NLRA. The Fifth Circuit agreed with the NLRB that the employer had to clarify with its employees that the arbitration agreement did not eliminate their right to pursue claims of unfair labor practices.

The Horton case arose when an employee sought to initiate an arbitration of a nationwide class of superintendents that Horton had allegedly misclassified as exempt from statutory overtime protections in violation of the Fair Labor Standards Act (FLSA). Horton responded that the arbitration agreement barred pursuit of collective claims. The employee then filed an unfair labor practice charge, alleging that the class action waiver violated the NLRA.

Employees Cannot be Prohibited from Filing Claims with the NLRB

The Administrative Law Judge concluded that the Mutual Arbitration Agreement violated the NLRA because its language would cause employees reasonably to believe they could not file unfair labor practice charges with the NLRB. The NLRB upheld the decision of the Administrative Law Judge ordering Horton to rescind or revise the agreement to clarify that employees were not prohibited from filing charges with the NLRB.

The NLRB further concluded that the arbitration agreement interfered with the exercise of the employees’ substantive rights under Section 7 of the NLRA, which allows employees the right to self-organization…and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection. In the NLRB’s opinion, by requiring employees to refrain from collective or class claims, the Mutual Arbitration Agreement infringed on the substantive rights protected by the NLRA.

Federal Arbitration Act

Horton argued to the 5th Circuit that the NLRB’s interpretation of the NLRA impermissibly conflicts with the Federal Arbitration Act (FAA) by prohibiting the enforcement of an arbitration agreement. In response, the Fifth Circuit noted that Section 7 of the NLRA was Congress’s intent to equalize bargaining power between employees and employers by allowing employees to band together in confronting an employer regarding the terms and conditions of their employment. NLRB precedent and some circuit cases protected collective-filing suits. 127 Rest. Corp., 331 NLRB 269, 275-76 (2000); Brady v. Nat’l Football League, 644 F.3d 661, 673 (8th Cir. 2011).

The Fifth Circuit explained in contrast that “there are numerous decisions holding that there is no right to use class procedures under various employment-related statutory frameworks. For example, the US Supreme Court has determined that there is no substantive right to class procedures under the Age Discrimination in Employment Act, despite the statute providing for class procedures. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 (1991). Further, there is no substantive right to proceed collectively under the FLSA. Carter v. Countrywide Credit Indus., Inc., 362 F.3d 294, 298 (5th Cir. 2004); see also Adkins v. Labor Ready, Inc., 303 F.3d 496, 506 (4th Cir. 2002); Kuehner v. Dickinson & Co., 84 F.3d 316, 319–20 (9th Cir. 1996).

The NLRB further reasoned in its opinion that the policy behind the NLRA trumped the different policy considerations in the FAA that supported enforcement of arbitration agreements. In response to this reasoning, the 5th Circuit examined the terms of the FAA. Arbitration agreements must be enforced according to their terms. CompuCredit Corp. v. Greenwood, 132 S .Ct. 665, 669 (2012). Two exceptions to this rule are at issue here: (1) an arbitration agreement may be invalidated on any ground that would invalidate a contract under the FAA’s “saving clause,” AT&T Mobility LLC v. Concepcion, 132 U.S. 665 (2011); and (2) application of the FAA may be precluded by another statute’s contrary congressional command, CompuCredit, 132 S.Ct. at 669.

The Fifth Circuit concluded that NLRB’s reliance on the “savings clause” was not applicable. Also, the NLRA did not contain a congressional command to override the FAA. There was no contrary “express command” in the NLRA’s general thrust or legislative history, and no inferred command “from an inherent conflict between the FAA and the NLRA’s purpose.” The type of collective action provided for and protected by the NLRA was aimed at equalizing bargaining power between employees and employers, which is insufficient to override the FAA.

Furthermore, the Fifth Circuit was aligning with the decisions of the other circuits holding that arbitration agreements containing class waivers are enforceable. See Richards v. Ernst & Young, LLP, – F.3d — , 2013 WL 4437601 (9th Cir. Aug. 21, 2013), Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297-98 n.8 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1055 (8th Cir. 2013).

Although Horton successfully barred collective or class action arbitrations, ultimately, the Fifth Circuit agreed with the NLRB holding that the Mutual Arbitration Agreement violated Section 8(a)(1) and (4) of the NLRA for including language that would lead employees to a reasonable belief that they were prohibited from filing unfair labor practice charges. The NLRB’s finding that the Mutual Arbitration Agreement could be misconstrued was reasonable, and Horton was ordered to rescind or revise the agreement to clarify that employees were not prohibited from filing charges with the NLRB.

The Take Away for Employers

The importance of the decision by the Fifth Circuit Court of Appeals is the favorable ruling for the continued use of arbitration between employers and employees. Although some clarification of the Horton Mutual Arbitration Agreement was needed, class action arbitration was barred. Employers should be aware that the appeal delays in this matter have not expired, and there is speculation that the case may be appealed to the United States Supreme Court. Thus, the Horton decision and class action waivers merit continued attention in 2014. 

Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.