NLRB Finds Arbitration Provision Unlawful, Calling Class Action Ban NLRA Interference

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The National Labor Relations Board held Jan. 3 that a Florida-based home builder committed an unfair labor practice under federal labor law by maintaining a mandatory arbitration agreement that waived the rights of employees to participate in class or collective actions (D.R. Horton Inc., 357 N.L.R.B. No. 184, 1/3/12 [released 1/6/12]).

NLRB Chairman Mark Gaston Pearce and Member Craig Becker found that D.R. Horton Inc.'s mandatory arbitration procedure violates Section 8(a)(1) of the National Labor Relations Act because it interferes with the statutory right of employees to engage in “concerted activity” for their mutual aid or protection. Member Brian E. Hayes was recused and did not participate in deciding the case.

Sustaining an unfair labor practice charge filed by a Horton superintendent who claimed that he and other employees were prevented from pursuing claims that they were misclassified as exempt workers under the Fair Labor Standards Act, Pearce and Becker said Horton's dispute resolution procedure illegally blocked employees from pursuing class or collective actions in court or in arbitration.

Addressing an issue of first impression for the board, Pearce and Becker wrote that their NLRA unfair labor practice finding does not conflict with the text or the policies of the Federal Arbitration Act.

Dispute Began Over FLSA Claims.

According to the decision and NLRB records, Michael Cuda was employed as a superintendent for less than a year. Like other employees, he had signed a “mutual arbitration agreement” (MAA) as a condition of employment with Horton.

The arbitration agreement provided that an arbitrator “may hear only Employee's individual claims and does not have the 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.”

When a lawyer gave Horton notice in 2008 that he intended to initiate arbitration of FLSA claims on behalf of Cuda and a nationwide class of similarly situated superintendents, the company objected, citing the MAA's prohibition on arbitration of collective claims.

Cuda filed an unfair labor practice charge, and the NLRB general counsel issued a complaint alleging that maintaining the MAA violated Section 8(a)(1) of the NLRA, which prohibits employers from interfering with, restraining, or coercing employees in the exercise of rights guaranteed by Section 7 of the act, including the right to engage in concerted activity.

The NLRB complaint also alleged that the company's mandatory arbitration provision violated Sections 8(a)(1) and 8(a)(4) of the NLRA. Section 8(a)(4) prohibits discrimination against an employee who has filed charges or given testimony under the NLRA.

ALJ Decision Was Appealed to Board.

An administrative law judge found that the company violated sections 8(a)(1) and 8(a)(4) by leading employees to believe that they were prohibited from filing NLRB charges, but he dismissed the general counsel's allegation that the arbitration policy interfered with the NLRA right of employees to engage in concerted activity for their mutual aid or protection.

The ALJ concluded, “I am not aware of any Board decision holding that an arbitration clause cannot lawfully prevent class action lawsuits or joinder of arbitration claims.”

Acting General Counsel Lafe E. Solomon filed exceptions with the board on the Section 8(a)(1) ruling. The board invited (9 WLR 1049, 6/24/11) interested parties to file amicus briefs on the legality of the class arbitration waiver, and more than a dozen organizations did so (9 WLR 1329, 8/5/11).

Class, Collective Claims Called Concerted Action.

The U.S. Supreme Court held in Eastex Inc. v. NLRB, 437 U.S. 556, 98 LRRM 2717 (1978), that the right to engage in concerted activity protects employees who attempt to improve their working conditions through proceedings in court and in administrative forums. “The same is equally true of resort to arbitration,” Pearce and Becker wrote.

Pursuing employee rights through class or collective procedures “are at the core of what Congress intended to protect by adopting the broad language of Section 7,” the board members wrote, observing that if Horton employees had gone on strike to compel management compliance with the FLSA, the job action would have been considered concerted activity.


The board found D.R. Horton Inc.'s mandatory arbitration procedure violates Section 8(a)(1) of the National Labor Relations Act because it interferes with the statutory right of employees to engage in “concerted activity” for their mutual aid or protection.  


Horton's MAA, the board said, “requires employees, as a condition of their employment, to refrain from bringing collective or class claims in any forum: in court, because the MAA waives their right to a judicial forum; in arbitration, because the MAA provides that the arbitrator cannot consolidate claims or award collective relief.”

“The MAA thus clearly and expressly bars employees from exercising substantive rights that have long been held protected by Section 7 of the NLRA,” the board members concluded.

Blocking Group Action Was NLRA Interference.

Noting that the board has held that employers may not secure agreements from individual employees waiving their right to engage in concerted activity, the board members said that even before the enactment of the NLRA, the Norris-LaGuardia Act provided protection for concerted activity.

“The agreement at issue here, then, not only bars the exercise of rights at the core of those protected by Section 7, but implicates prohibitions that predate the NLRA and are central to modern Federal labor policy,” Pearce and Becker said.

The board members rejected an approach taken by then-General Counsel Ronald Meisburg in a 2010 memorandum that provided a class-action waiver would not be considered per se unlawful under the NLRA if the waiver made it clear to employees that they could act in concert to challenge the waiver itself and would not be subjected to any employer retaliation if they did so.

“When, as here, employers require employees to execute a waiver as a condition of employment, there is an implicit threat that if they refuse to do so, they will be fired or not hired,” the board said. Under such circumstances, they concluded, a policy like Horton's “violates Section 8(a)(1) because it expressly restricts Section 7 activity or, alternatively, because employees would reasonably read it as restricting such activity.”

Board Finds No Conflict With Arbitration Act.

The principal argument of Horton and amici supporting the company was that an NLRB unfair labor practice finding would conflict with the Federal Arbitration Act, Pearce and Becker said. They called the question “an issue of first impression for the Board,” and they rejected the contention.

The board members wrote that the purpose of the FAA was to prevent courts from treating arbitration agreements less favorably that other private contracts. The Horton dispute did not threaten such less favorable treatment, they said.

“To find that an arbitration agreement must yield to the NLRA is to treat it no worse than any other private contract that conflicts with Federal labor law. The MAA would equally violate the NLRA if it said nothing about arbitration, but merely required employees, as a condition of employment, to agree to pursue any claims in court against the Respondent solely on an individual basis,” the board said.

The board members said the dispute over a class-action waiver is not simply a controversy over the procedures available. “The issue here is whether Respondent may lawfully condition employment on employees' waiving their right under the NLRA to take the collective action inherent in seeking class certification, whether or not they are ultimately successful under [the class action procedures of] Rule 23,” they wrote.

Supreme Court Rulings Distinguishable.

Horton and some amici argued that in 14 Penn Plaza v. Pyett, 129 S. Ct. 1456, 105 FEP Cases 1441 (2009) (7 WLR 463, 4/3/09), the Supreme Court held that a union may agree in collective bargaining to an arbitration claim that waives the right of employees to bring court actions to enforce their rights under Title VII of the 1964 Civil Rights Act or the Age Discrimination in Employment Act.

But Pearce and Becker said it is well settled that a union may waive certain Section 7 rights in exchange for employer concessions in bargaining. “The negotiation of such a waiver stems from an exercise of Section 7 rights: the collective-bargaining process,” the board said, while Horton's requirement for employees to resolve claims only through individual arbitration proceedings is a requirement that they forgo the NLRA right to engage in concerted activity.

The board also found that its ruling is not inconsistent with the Supreme Court stating that parties cannot be required to submit to classwide arbitration. Citing Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010) (8 WLR 644, 4/30/10) and AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011) (9 WLR 669, 4/29/11), the board said neither case involved NLRA rights or even employment agreements.

The board commented that in AT&T Mobility, the court was considering a conflict between the FAA and state law, implicating the supremacy clause, while the Horton dispute involves an argument that the FAA and the NLRA are in conflict.

Pearce, Becker Call Ruling Limited in Scope.

“We need not and do not mandate class arbitration in order to protect employees' rights under the NLRA,” Pearce and Becker wrote.

“Rather, we hold only that employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, arbitral and judicial. So long as the employer leaves open a judicial forum for class and collective claims, employees' NLRA rights are preserved without requiring the availability of classwide arbitration. Employers remain free to insist that arbitral proceedings be conducted on an individual basis.”

Pearce and Becker said they were not resolving “the more difficult questions of (1) whether an employer can require employees, as a condition of employment, to waive their right to pursue class or collective action in court so long as the employees retain the right to pursue class claims in arbitration and (2) whether, if arbitration is a mutually beneficial means of dispute resolution, an employer can enter into an agreement that is not a condition of employment with an individual employee to resolve either a particular dispute or all potential employment disputes through non-class arbitration rather than litigation in court.”

They also said they found it unnecessary to rule on the ALJ's finding that Horton violated Section 8(a)(4) of the NLRA, observing that an “additional violation would not materially affect the remedy.”

Management Lawyer Calls Ruling ‘Monumental.'

Attorneys contacted by Bloomberg BNA Jan. 9 had different views of the merits of the board ruling, but they agreed on its importance.

Marshall Babson, a partner at Seyfarth Shaw in New York and a former NLRB member, called the ruling the board's most important decision of the last year. Observing that nearly 40 percent of all civil cases pending in federal courts recently have been employment litigation matters, Babson said that many employers have adopted private arbitration systems that have been fair and regular while preserving access to remedies, and providing dispute resolution by neutral arbitrators.

Employers have incorporated class or collective action waivers in arbitration agreements, Babson said, but they must now confront an NLRB ruling that he called “monumental in its sweep.”

The management lawyer said that “in its purest form,” the NLRA protects the right of employees to act together to seek protection through grievances or lawsuits, but he said “a lot has gone on” since the announcement of early board decisions recognizing such principles.

The question, Babson said, is how to accommodate Section 7 of the NLRA with equally important rights and principles under the FAA.

The board ruling gave “lip service” to such an effort, he said, but there was “no real consideration” of the competing policies of the FAA and the NLRA. Arguing the board members effectively “thumbed their noses at arbitration,” Babson said Pearce and Becker also understated the importance of the decision. Given that many employers, including very large firms, have arbitration policies with class action waivers, the impact of the board's ruling will “not be modest,” Babson predicted.

Union Attorney: Decision ‘Resets the Playing Field.'

Michael Rubin, a partner in Altshuler Berzon in San Francisco, was one of the attorneys who filed an amicus brief in the case on behalf of the Service Employees International Union.

Rubin noted that the Labor Department and the Equal Employment Opportunity Commission joined in a brief to NLRB that supported the result reached by the board. He complimented the board's decision as a thorough review of approximately 70 years of settled principles and their application to the “core Section 7 right to act collectively.”

As a practical matter, the NLRB ruling “resets the playing field to the way it was” before the Supreme Court's ruling in AT&T Mobility v. Concepcion, the lawyer said. The high court's ruling effectively allowed employers to pick the employee rights that employees could enforce outside of individual arbitration proceedings, he said.

Now, Rubin said, employees who may have no effective means of enforcing their rights other than a collective proceeding, will be able to go to court or arbitration with class or collective claims.

Rubin agreed that the decision will have a major impact on employers, and said he anticipates that NLRB's acting general counsel will issue complaints against more employers and will seek injunctive relief under Section 10(j) of the NLRA if such action is required to compel employers to back away from arbitration policies that limit employees' right to engage in protected concerted activity.


Text of the decision may be accessed at http://op.bna.com/dlrcases.nsf/r?Open=ldue-8qcpa9.