NLRB: Class Action Waivers Unfair Under the NLRA

The MAA also included an express waiver of the right to obtain class-wide relief, either in arbitration or through litigation. To this end, the MAA provided that an arbitrator “may hear only [an] Employee's individual claims” and that the arbitrator “will not have the authority to consolidate the claims of other employees” into a single arbitration. The MAA provided further that an arbitrator “does not have authority to fashion a proceeding as a class or collective action or to award relief to a group or class of employees in one arbitration proceeding.”

In 2008, Cuda notified D.R. Horton that he intended to invoke the MAA to arbitrate a collective action claim that the company has misclassified superintendents as exempt employees under the Fair Labor Standards Act. D.R. Horton responded that Cuda's notice was ineffective, based on the prohibition against class and collective action arbitration.

Thereafter, Cuda filed an unfair labor practice charge and the NLRB's General Counsel issued a Complaint alleging that the D.R. Horton had violated the NLRA. After a one-day trial, an Administrative Law Judge (ALJ) upheld the class and collective action bar, but held that D.R. Horton had committed an unfair labor practice for the separate reason that employees could “reasonably conclude that they are barred or restricted from filing NLRB charges” based on the language of the MAA. The General Counsel and D.R. Horton each filed exceptions to the ALJ's decision. On appeal, the NLRB reversed the ALJ and held that the class and collective action waiver in the MAA was an unfair labor practice.

The NLRB's Analysis and Reasoning

The NLRB based its D.R. Horton decision on two important legal conclusions. First, the NLRB held that the NLRA vests all employees with a substantive right to bring class-wide or collective action employment claims, and that the MAA impermissibly restricted that right. Second, the NLRB held that its interpretation of the NLRA did not conflict with the Federal Arbitration Act (FAA) or the United States Supreme Court's April 2011 decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).

NLRA Permits Employees to Bring Class-Wide Employment Claims

The NLRB emphasized that Section 7 of the NLRA grants employees the right “to engage in ' concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 9 U.S.C. ' 157. The NLRB also emphasized that, under Section 8(a)(1) of the NLRA, it is an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in [Section 7].” Id., ' 158(a)(1).

Applying these principles, the NLRB found that the rights guaranteed by Section 7 include a substantive right for employees to “join together to bring employment-related claims on a class-wide or collective action basis in court or before an arbitrator.” The NLRB also found that a separate labor statute, the Norris-LaGuardia Act, prohibits agreements between employers and individual employees that waive class and collective action rights. The NLRB rejected the argument, advanced by a number of amici supporting D.R. Horton, that those rights were adequately protected because the MAA allowed employees to “act concertedly to challenge the waiver itself” in court, and because employees could still discuss their claims collectively prior to initiating arbitration, pool their resources to retain counsel, and file similar or coordinated individual claims.

No Conflict with FAA or Supreme Court Decision in Concepcion

The NLRB acknowledged that the FAA reflects “a liberal federal policy favoring arbitration agreements,” but identified three reasons supporting its conclusion that the FAA did not require enforcement of the MAA's class and collective action waiver. First, the NLRB explained that, while the FAA prevents courts “from treating arbitration agreements less favorably than other private contracts,” any private contract restricting substantive Section 7 rights would be invalid under the NLRA. Second, the NLRB found that prior Supreme Court jurisprudence confirmed that an arbitration agreement may not require an employee to forego the substantive rights guaranteed by other federal statutes, including the NLRA. And third, the NLRB held that “nothing in the text of the FAA suggests that an arbitration agreement that is inconsistent with the NLRA is nevertheless enforceable.”

The NLRB also distinguished the Supreme Court's recent Concepcion decision, which held that the FAA preempts state laws conditioning the validity of an arbitration agreement on an employee's or a consumer's right to pursue class-wide relief. The NLRB held that conflicts between federal and state laws (as was the situation in Concepcion), which are governed by the Supremacy Clause, must be analyzed separately from conflicts between two federal statutes. In this case, the NLRB found that the FAA's pro-arbitration policy would have to yield to the Norris-LaGuardia Act in the event of an actual conflict, as the Norris-LaGuardia Act was passed after the FAA and expressly repealed all prior conflicting statutes.

What Does D.R. Horton Mean for Your Company?

The number of corporations adopting mandatory arbitration policies has grown substantially over the past decade, as more employers have recognized the benefits that arbitration may provide for both them and their employees. Arbitration is often less costly and more efficient than litigation, and provides parties with the opportunity to have their disputes resolved by an adjudicator with specialized employment law expertise. A series of decisions from the Supreme Court and other federal courts upholding mandatory arbitration policies has further spurred the explosive growth of employment arbitration.

Most recently, in Concepcion, the Supreme Court signaled its approval of mandatory arbitration policies that include class and collective action waivers, provided that the policies otherwise pass muster under generally applicable contract law. Many commentators believed that Concepcion put to rest any dispute as to the legal viability of corporate arbitration polices that require employees to waive their class action rights. By issuing the D.R. Horton decision, the NLRB sent a clear message in response: Concepcion may have held that mandatory arbitration policies with class action waivers are permissible under the FAA, but such policies may nonetheless also be an unfair labor practice under the NLRA.

The D.R. Horton decision is certain to be appealed to the federal courts on a number of grounds. Most notably, the NLRB emphasized repeatedly its view that federal labor law grants employees a substantive right to pursue class-wide or collective relief, a position that conflicts starkly with the widely accepted judicial view that the right to maintain a class or collective action is procedural. Moreover, the argument that employees may still act collectively to challenge the validity of a class action waiver as applied to a specific case, which was discounted by the NLRB, may carry more weight in court. At least one federal court has already expressly declined to follow D.R. Horton and upheld a collective action waiver against an employee's FLSA claim. See LaVoice v. UBS Financial Servs., No. 11 Civ. 2308 (BSJ)(JLC), 2012 U.S. Dist. LEXIS 5277 (S.D.N.Y. Jan. 13, 2012).

Nevertheless, D.R. Horton represents the NLRB's final word on class and collective action waivers, and the decision will be bind all NLRB regional offices unless overturned by a federal appellate court. Therefore, any mandatory employment arbitration policy containing a class or collective action waiver provision may expose an employer to unfair labor practice liability under the NLRA. Upon an unfair labor practice finding, the NLRB may order an employer to rescind or revise its unlawful policy and thereby require the employer to take on the significant additional expense and employee relations hurdles necessary to adopt a confirming arbitration policy. See generally 29 U.S.C. ' 160.

The D.R. Horton decision confirms that employers should proceed with caution when designing mandatory arbitration policies. Employers considering adopting arbitration policies should therefore consider carefully the risks and benefits associated with including a class or collective action waiver. The opportunity to avoid class and collective action litigation may seem appealing at first blush, but must be weighed against the increased risk that the arbitration policy will be subject to challenge under the NLRA. Employers that have already adopted arbitration policies with class or collective action waivers should closely monitor future developments in the D.R. Horton case, and should prepare for the possibility that their policies may be challenged under federal labor law.

Mark Blondman is a partner, and Frederick G. Sandstrom is an associate in the Employment, Benefits and Labor group at Blank Rome LLP. They can be reached at [email protected] or [email protected], respectively.

The National Labor Relations Board (NLRB) recently called into question the growing practice of including class action waivers in employee arbitration agreements, holding that the mandatory waiver of an employee's right to pursue class or collective action litigation is an unfair labor practice under the National Labor Relations Act (NLRA). The NLRB's Jan. 3, 2012 decision in D.R. Horton, Inc. and Michael Cuda, Case 12-CA-25764, serves as an important reminder that the state of the law regarding class action waivers remains unsettled, and that employers should tread carefully in considering whether to add class action waivers to an arbitration program.

Relevant Chronology

Michael Cuda was employed by D.R. Horton, Inc., a nationwide home builder, as a superintendant from July 2005 to April 2006. In January 2006, D.R. Horton implemented a company-wide arbitration policy, and required all new and current employees to execute a Mutual Arbitration Agreement (MAA) as a condition of employment. The MAA provided that arbitration would be the exclusive forum for all employment-related claims brought by D.R. Horton and its employees, and required each employee to waive “the right to file a lawsuit or other civil proceeding relating to [the] Employee's employment with the Company.”

The MAA also included an express waiver of the right to obtain class-wide relief, either in arbitration or through litigation. To this end, the MAA provided that an arbitrator “may hear only [an] Employee's individual claims” and that the arbitrator “will not have the authority to consolidate the claims of other employees” into a single arbitration. The MAA provided further that an arbitrator “does not have authority to fashion a proceeding as a class or collective action or to award relief to a group or class of employees in one arbitration proceeding.”

In 2008, Cuda notified D.R. Horton that he intended to invoke the MAA to arbitrate a collective action claim that the company has misclassified superintendents as exempt employees under the Fair Labor Standards Act. D.R. Horton responded that Cuda's notice was ineffective, based on the prohibition against class and collective action arbitration.

Thereafter, Cuda filed an unfair labor practice charge and the NLRB's General Counsel issued a Complaint alleging that the D.R. Horton had violated the NLRA. After a one-day trial, an Administrative Law Judge (ALJ) upheld the class and collective action bar, but held that D.R. Horton had committed an unfair labor practice for the separate reason that employees could “reasonably conclude that they are barred or restricted from filing NLRB charges” based on the language of the MAA. The General Counsel and D.R. Horton each filed exceptions to the ALJ's decision. On appeal, the NLRB reversed the ALJ and held that the class and collective action waiver in the MAA was an unfair labor practice.

The NLRB's Analysis and Reasoning

The NLRB based its D.R. Horton decision on two important legal conclusions. First, the NLRB held that the NLRA vests all employees with a substantive right to bring class-wide or collective action employment claims, and that the MAA impermissibly restricted that right. Second, the NLRB held that its interpretation of the NLRA did not conflict with the Federal Arbitration Act (FAA) or the United States Supreme Court's April 2011 decision in AT&T Mobility LLC v. Concepcion , 131 S. Ct. 1740 (2011).

NLRA Permits Employees to Bring Class-Wide Employment Claims

The NLRB emphasized that Section 7 of the NLRA grants employees the right “to engage in ' concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 9 U.S.C. ' 157. The NLRB also emphasized that, under Section 8(a)(1) of the NLRA, it is an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in [Section 7].” Id., ' 158(a)(1).

Applying these principles, the NLRB found that the rights guaranteed by Section 7 include a substantive right for employees to “join together to bring employment-related claims on a class-wide or collective action basis in court or before an arbitrator.” The NLRB also found that a separate labor statute, the Norris-LaGuardia Act, prohibits agreements between employers and individual employees that waive class and collective action rights. The NLRB rejected the argument, advanced by a number of amici supporting D.R. Horton, that those rights were adequately protected because the MAA allowed employees to “act concertedly to challenge the waiver itself” in court, and because employees could still discuss their claims collectively prior to initiating arbitration, pool their resources to retain counsel, and file similar or coordinated individual claims.

No Conflict with FAA or Supreme Court Decision in Concepcion

The NLRB acknowledged that the FAA reflects “a liberal federal policy favoring arbitration agreements,” but identified three reasons supporting its conclusion that the FAA did not require enforcement of the MAA's class and collective action waiver. First, the NLRB explained that, while the FAA prevents courts “from treating arbitration agreements less favorably than other private contracts,” any private contract restricting substantive Section 7 rights would be invalid under the NLRA. Second, the NLRB found that prior Supreme Court jurisprudence confirmed that an arbitration agreement may not require an employee to forego the substantive rights guaranteed by other federal statutes, including the NLRA. And third, the NLRB held that “nothing in the text of the FAA suggests that an arbitration agreement that is inconsistent with the NLRA is nevertheless enforceable.”

The NLRB also distinguished the Supreme Court's recent Concepcion decision, which held that the FAA preempts state laws conditioning the validity of an arbitration agreement on an employee's or a consumer's right to pursue class-wide relief. The NLRB held that conflicts between federal and state laws (as was the situation in Concepcion), which are governed by the Supremacy Clause, must be analyzed separately from conflicts between two federal statutes. In this case, the NLRB found that the FAA's pro-arbitration policy would have to yield to the Norris-LaGuardia Act in the event of an actual conflict, as the Norris-LaGuardia Act was passed after the FAA and expressly repealed all prior conflicting statutes.

What Does D.R. Horton Mean for Your Company?

The number of corporations adopting mandatory arbitration policies has grown substantially over the past decade, as more employers have recognized the benefits that arbitration may provide for both them and their employees. Arbitration is often less costly and more efficient than litigation, and provides parties with the opportunity to have their disputes resolved by an adjudicator with specialized employment law expertise. A series of decisions from the Supreme Court and other federal courts upholding mandatory arbitration policies has further spurred the explosive growth of employment arbitration.

Most recently, in Concepcion, the Supreme Court signaled its approval of mandatory arbitration policies that include class and collective action waivers, provided that the policies otherwise pass muster under generally applicable contract law. Many commentators believed that Concepcion put to rest any dispute as to the legal viability of corporate arbitration polices that require employees to waive their class action rights. By issuing the D.R. Horton decision, the NLRB sent a clear message in response: Concepcion may have held that mandatory arbitration policies with class action waivers are permissible under the FAA, but such policies may nonetheless also be an unfair labor practice under the NLRA.

The D.R. Horton decision is certain to be appealed to the federal courts on a number of grounds. Most notably, the NLRB emphasized repeatedly its view that federal labor law grants employees a substantive right to pursue class-wide or collective relief, a position that conflicts starkly with the widely accepted judicial view that the right to maintain a class or collective action is procedural. Moreover, the argument that employees may still act collectively to challenge the validity of a class action waiver as applied to a specific case, which was discounted by the NLRB, may carry more weight in court. At least one federal court has already expressly declined to follow D.R. Horton and upheld a collective action waiver against an employee's FLSA claim. See LaVoice v. UBS Financial Servs., No. 11 Civ. 2308 (BSJ)(JLC), 2012 U.S. Dist. LEXIS 5277 (S.D.N.Y. Jan. 13, 2012).

Nevertheless, D.R. Horton represents the NLRB's final word on class and collective action waivers, and the decision will be bind all NLRB regional offices unless overturned by a federal appellate court. Therefore, any mandatory employment arbitration policy containing a class or collective action waiver provision may expose an employer to unfair labor practice liability under the NLRA. Upon an unfair labor practice finding, the NLRB may order an employer to rescind or revise its unlawful policy and thereby require the employer to take on the significant additional expense and employee relations hurdles necessary to adopt a confirming arbitration policy. See generally 29 U.S.C. ' 160.

The D.R. Horton decision confirms that employers should proceed with caution when designing mandatory arbitration policies. Employers considering adopting arbitration policies should therefore consider carefully the risks and benefits associated with including a class or collective action waiver. The opportunity to avoid class and collective action litigation may seem appealing at first blush, but must be weighed against the increased risk that the arbitration policy will be subject to challenge under the NLRA. Employers that have already adopted arbitration policies with class or collective action waivers should closely monitor future developments in the D.R. Horton case, and should prepare for the possibility that their policies may be challenged under federal labor law.

Mark Blondman is a partner, and Frederick G. Sandstrom is an associate in the Employment, Benefits and Labor group at Blank Rome LLP. They can be reached at [email protected] or [email protected], respectively.