Employer's May Require Employees to Waive Right to Class Actions

December 9, 2013

On December 3, 2013, the United States Court of Appeals for the Fifth Circuit reversed the National Labor Relations Board's (Board) 2012 decision that an employer violated Section 8(a)(1) of the National Labor Relations Act (NLRA) by requiring employees to sign an arbitration agreement that waived the employees' right to bring a class action in Federal or State courts or to allege a class action in arbitrations.

In D.R. Horton , 357 NLRB No 184 (2012), the employer, a home builder, required employees to sign an agreement (1) waiving their right to trial in court before a judge or jury; (2) requiring the employee to arbitrate all employment disputes or claims, including wage, benefits or other compensation claims; and (3) prohibiting the arbitrator from consolidating claims of other employees or fashioning the arbitration as a class or collective action.

One of the employer's superintendents threatened to file a nationwide class action arbitration alleging the employer misclassified its superintendents as exempt from the overtime provisions of the Fair Labor Standards Act. When the employer refused to arbitrate, citing the provision of the arbitration agreement prohibiting class actions, the employee filed an unfair labor practice charge with the Board alleging the arbitration agreement's ban on class action arbitration and lawsuits violated Section 7 of the NLRA. The Board held that the employer's policy violated the NLRA because it led employees to believe that they could not file an unfair labor practice. The Board also held that the employer's ban on the filing of a class action arbitration or judicial proceeding violated the Act because it prevented employees from acting together to resolve employment disputes. The Board ordered the employee to rescind or revise its policy to clarify that the employees were not prohibited from filing charges with the Board or from resolving employment related claims collectively or as a class.

On appeal, the Fifth Circuit held that the Board erred when it found that D.R. Horton interfered with the employees Section 7 rights by maintaining a mandatory arbitration agreement waiving the employees' rights to a class or collective action. The court rejected the Board's argument that the NLRA permitted the Board to ignore other important congressional objectives, specifically Congress's desire to encourage arbitration as set forth in the Federal Arbitration Act (FAA). The court concluded that D.R. Horton's arbitration agreement must be enforced according to its terms including the waiver of class or collective actions.

However, the court did find that the arbitration agreement would violate the NLRA if it led employees to believe that the agreement prohibited employees from filing unfair labor practice claim with the Board. The agreement stated that the employees agreed to arbitrate "without limitation claims for discrimination or harassment; wage, benefits, or other compensation; breach of any express or implied contract; [and] violations of public policy." The agreement concluded with an employee's acknowledgement that the employee "knowingly and voluntarily waive[s] the right to file a lawsuit or other civil proceeding relating to Employee's employment with [Horton] as well as the right to resolve employment-related disputes in a proceeding before a judge or jury." (Emphasis added by the court). Based on this language, the court concluded that employees could reasonably interpret the agreement as prohibiting the filing of an unfair labor practice complaint with the Board and therefore violated the NLRA.

The court denied enforcement of the Board's order invalidating the arbitration agreement's waiver of class procedures but enforced the Board's order that D.R. Horton rewrite the agreement to clarify that employees could file unfair labor practice charges rather than arbitrate those charges.

Practice Pointers:

Employers who maintain pre-dispute arbitration agreement should review their plans to ensure they comply with the holding of the court in D.R. Horton .

Employers may have pre-dispute arbitration agreements that prevent the employees from bringing class action or collective actions in an arbitral or judicial forum.
In any arbitration agreement, employers must avoid language that employees could reasonably construe as preventing the employees from filing an unfair labor practice.
Although not addressed in the D.R. Horton decision, any pre-dispute arbitration agreement must comply with due process requirements established by federal or state courts or by Congress or state legislatures.

If you have any questions about arbitration agreements, you may contact Tom Brady, (313) 965-8291, tbrady@clarkhill.com , or another member of the Labor and Employment Practice Group.