NLRB Decision Finds Arbitration Agreement Prohibiting Class or Collective Action Unlawful
Does your company require its employees to sign a mandatory agreement to arbitrate? Depending on the content of that agreement, you may want to rethink this policy. The National Labor Relations Board (the "Board") has ruled that a home building company violated the National Labor Relations Act (the "Act") by requiring its employees to sign a mandatory arbitration agreement, which prevented them from pursuing employment-related class or collective action claims against the company. Section 7 of the Act provides that employees—whether unionized or not—have the legally-protected right to band together for "mutual aid or protection" regarding their working conditions, and courts have held that employment-related class and collective action lawsuits constitute the sort of "concerted activity" protected by the Act. In D.R. Horton, Inc., the Board found that the company’s Mutual Arbitration Agreement ("MAA"), which required all employees to submit their employment-related claims to arbitration, constituted an unfair labor practice because it interfered with the rights of those employees to engage in concerted activity. The Board also found that the MAA violated the Act because its broad language would lead employees to believe that they were prohibited from filing unfair labor practice charges with the Board.
The Board’s Decision
In D.R. Horton, Inc., the Board reviewed an unfair labor practice charge filed by Michael Cuda, who was required to execute the MAA as a condition of his continued employment. The MAA established that all employment-related disputes would be resolved through arbitration, and that Mr. Cuda waived his right to file a "lawsuit or other civil proceeding" related to his employment with the company. The MAA also stated that the arbitrator could not consolidate the claims of different employees or conduct class-wide arbitrations. Instead, the arbitrator could only hear an employee’s individual claims. However, after agreeing to the MAA, Mr. Cuda notified D.R. Horton that he intended to arbitrate a nationwide collective claim on behalf of himself and other employees who claimed they were misclassified as exempt under the Fair Labor Standards Act. When D.R. Horton objected to Mr. Cuda’s collective arbitration, he filed an unfair labor practice charge with the Board, alleging that the MAA’s arbitration provision violated his right to engage in concerted activity.
The Board’s decision, released January 3, 2012, held that the MAA violated the Act in two respects. First, the Board ruled that the MAA violated the Act because it required employees to submit all employment-related claims to arbitration and forego a "lawsuit or other civil proceeding," which could lead employees to believe that they were prohibited from filing unfair labor practices charges with the Board. Additionally, the Board ruled that employees cannot be required, as a condition of employment, to enter into agreements that restrict their rights under Section 7 of the Act. The Board explained that the MAA’s mandatory, individual-claim-only arbitration provision unlawfully restricted Mr. Cuda’s right to engage in the sort of concerted activity that is protected by Section 7 because he was required to waive his right to join his claim with the claims of other employees for "mutual aid and protection" regarding the terms and conditions of their employment.
Notably, the Board clarified the scope of its decision, emphasizing that its ruling is limited to agreements that require employees to waive their right to collectively pursue employment-related claims in all forums. The Board explained that if an employer permits employees to pursue class and collective claims in court, its employees’ Section 7 rights are preserved without requiring the availability of class-wide arbitration. The Board also stated that employers remain free to insist upon arbitration for individual employment-related claims.
Practical Implications
The ruling in D.R. Horton, Inc. is limited in several significant ways. Namely, it only applies to employees and employers who are subject to the Act, and therefore does not apply to agreements with supervisors, managerial employees, and independent contractors. Additionally, the Board only addressed agreements that require employees to forego the right to employment-related class or collective actions, in all forums, as a condition of employment. The Board did not address whether employers may provide other inducements to secure such agreements, or whether employers may require employees to resolve class or collective actions through arbitration. However, it is important to note that the Board also found the MAA unlawful based upon language that would "lead employees reasonably to believe that they were prohibited from filing unfair labor practice charges with the Board," commenting in a footnote that the MAA required employees to waive their right to file a lawsuit or other judicial proceeding and included no exception to arbitration for charges of unfair labor practices. Accordingly, even agreements that provide for class or collective actions for employment-related disputes may still violate the Act if they are drafted in such a way that employees might reasonably believe they cannot file charges with the Board.
The D.R. Horton, Inc. decision is widely expected to be appealed, and to eventually wind up before the United States Supreme Court. In the meantime, however, the decision could lead the Board to issue more complaints against employers using mandatory arbitration agreements that prohibit employment-related class or collective actions. Employers should consult counsel to discuss the potential risks associated with any existing or future mandatory arbitration agreements with employees.