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August 28, 2014

NLRB Throws Cold Water on Mandatory Arbitration Provisions Prohibiting Class Actions in Employment Agreements

Any employer that has defended itself against a class action lawsuit, particularly one involving alleged violations of the minimum wage or overtime laws, knows how debilitating such litigation can be in terms of cost, time, morale and disruption to day-to-day operations. Defending wage and hour class actions—including investigating the claims, collecting documents and taking depositions—can cost hundreds of thousands of dollars and take up many hours of time. Going to trial is also extraordinarily expensive and time consuming. Furthermore, the wage and hour statutes typically allow a prevailing plaintiff to collect liquidated damages and attorneys' fees. Thus, even employers with good defenses often feel they have no choice but to settle, sometimes for hundreds of thousands or even millions of dollars.

Many advocate that the best way to minimize employer exposure to class litigation is to maintain practices and procedures that are compliant with relevant wage and hour laws. Unfortunately, such measures may still be no guarantee against class litigation. Recognizing this reality, some employers have begun requiring employees to sign mandatory arbitration agreements with class action waivers as a tool to limit their exposure. And the United States Supreme Court's April 2011 decision in AT&T Mobility v. Concepcion appeared to give a green light to this practice.

In Concepcion, the High Court reiterated the liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract, as established by the Federal Arbitration Act (FAA). Based on this overarching policy, the U.S. Supreme Court struck down a California Supreme Court rule that class action waivers contained in certain types of consumer contracts are unconscionable, declaring that the FAA preempted the California rule. Since Concepcion, other courts have enforced arbitration provisions containing class action waivers in a variety of contexts, thereby squelching attempts to pursue class claims. Since the rationale in Concepcion was not limited to particular types of contracts, it appeared to pave the way for employers to include mandatory arbitration provisions prohibiting class action claims in their employment agreements, including collective and class action wage and hour claims.

The NLRB Weighs In

In a very recent decision, D.R. Horton Inc., the National Labor Relations Board (NLRB) threw cold water on any such notion. The National Labor Relations Act (NLRA), which the NLRB enforces, safeguards the rights of employees to engage in "concerted activities for the purpose of...mutual aid or protection."
 
In Horton, the employer had required all of its employees to sign an arbitration agreement, which stipulated that all employment-related disputes must be resolved through individual arbitration and waived the employees' rights to a judicial forum. As a result, employees were barred from pursuing class or collective litigation of claims in any forum, arbitral or judicial. The NLRB case arose when an employee gave the employer notice that he intended to initiate arbitration of Fair Labor Standards Act (wage and hour) claims on behalf of himself and other employees. The employer objected, citing the arbitration agreement's class action waiver provision.

The NLRB found that the arbitration agreement unlawfully restricted the employees' substantive rights to engage in concerted action for mutual aid or protection under the NLRA, reasoning that collective and class actions are at the "core" of what Congress intended to protect in the NLRA. The NLRB thereby found that the employer violated the NLRA, which makes it an unfair labor practice for an employer "to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in" the NLRA. Because the NLRB concluded that class and collective actions are a substantive right under the NLRA, it reasoned that its decision did not conflict with Concepcion in light of the Supreme Court's acknowledgement that the FAA cannot be applied in a way that interferes with a substantive right.

The NLRB ordered D.R. Horton Inc. to cease and desist from maintaining the arbitration agreements or any agreements that waived its employees' rights to maintain class or collective actions in all forums, whether arbitral or judicial.

What's Next?

The Horton decision will very likely be appealed. More than a dozen organizations filed amici briefs with the NLRB prior to its decision, many of them against the position the NLRB ultimately took. Further fueling the likelihood of appeal, some believe the current NLRB membership to be "activist" and overly expansive in its view of the extent to which the NLRA's policies should reach beyond the unionized workplace to protect employees when they act in concert with one another or on the authority of other employees in relation to terms and conditions of employment. (See also "Social Media in the Workplace: NLRB Offers Guidance for ALL Employers on Offensive Posts and Social Media Policies" and "Recent NLRB Actions: Notice Posting Requirement, Proposed Election Rules and New Case Law Tilt Toward Organized Labor.") In addition, although the NLRB attempted to harmonize its decision with an iron-clad and imposing federal policy favoring the enforcement of arbitration agreements, there are a number of reasons why the decision may be susceptible to reversal on appeal.

At the outset, the NLRB's decision appears to go against the tide of recent Supreme Court case law heavily favoring arbitration based on the federal policy embodied in the FAA. As noted, the NLRB sought to reconcile its decision with this case authority by noting the Supreme Court's pronouncement that the policy favoring arbitration gave way where it interfered with substantive statutory rights. However, only a week after the Horton decision, the Supreme Court issued another decision, Compucredit Corp. v. Greenwood, in which it found that the policies underlying the Credit Repair Organizations Act, which granted a private right of action, did not overcome the FAA policy favoring arbitration. Also, in LaVoice v. UBS Financial Services, Inc., a federal district court recently declined to follow Horton's reading of Concepcion.

Moreover, the right of a class action is a procedural litigation tool governed by the judicial rules of procedure. Horton's reasoning that the right to maintain a class action is a substantive right afforded under the NLRA may be difficult to square with this premise, especially in light of the High Court's repeated deference to the FAA and its principles favoring arbitration over litigation.

Finally, the fact that the Horton decision was issued by a two-member NLRB panel may provide yet another basis for challenge. A recent Supreme Court decision held that final decisions of the five-seat NLRB may not be delegated to a panel with fewer than three members.

What Employers Should Do in Light of Horton

What should an employer do pending a definitive determination by the courts concerning the viability of Horton? Here are a few things to consider:

  • Act at your own peril to maintain or adopt an arbitration agreement with a class action waiver irrespective of Horton. Until the courts say otherwise, Horton is still the law as far as the NLRB is concerned. Thus, employers that already have included class action waivers in their employment contracts risk an unfair labor practice complaint if an employee challenges such an agreement. The same holds for an employer that seeks to add such a provision. The better course might be to wait and see whether Horton will be approved on review by a higher court.
  • Consider adopting an arbitration agreement without a class action waiver. This approach will force employees to arbitrate their claims, but without a limitation on their ability to do so collectively. Given the problems with class action proceedings in arbitration, this may or may not effectively accomplish an employer's objectives in having a compulsory arbitration mechanism.
  • In no event should an employer adopt or maintain an arbitration agreement whose limitations could be read as foreclosing employees from filing unfair labor practice charges collectively with the NLRB. The less controversial part of Horton found that, to the extent it could be read as barring collective access to the NLRB, the arbitration agreement violated the NLRA. Any arbitration agreement should, therefore, provide that nothing in its terms may be read as barring employees' rights to pursue remedies singly or collectively with the NLRB.
© 2014 Much Shelist, P.C.

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About this Author

Irving M. Geslewitz, Much Shelist Law Firm, Labor Employment Attorney
Principal

Irving M. Geslewitz, a Principal in the firm's Labor & Employment group, has extensive experience in representing employers from a broad spectrum of industries in all aspects of modern employment law, as well as traditional (union-related) labor law concerns. He regularly handles matters ranging from reviewing and helping prepare employment contracts, policies and manuals to representing clients in all types of employment-related litigation in state and federal courts and before administrative...

312-521-2414
Principal

Melinda J. Morales, a Principal in the firm’s Litigation & Dispute Resolution practice group, represents both plaintiffs and defendants in a range of complex commercial litigation matters in state and federal courts. Her practice encompasses a wide variety of civil trial and appellate matters involving general business litigation, insurance coverage issues and class actions.

312-521-2434