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Locke Lord QuickStudy: National Labor Relations Board Rules Mandatory Class Action Waivers by Employees Violate Federal Labor Law

1/11/2012

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National Labor Relations Board Rules Mandatory Class Action Waivers by Employees Violate Federal Labor Law

The National Labor Relations Board has issued its decision in D.R. Horton, Inc. and Michael Cuda, holding that mandatory arbitration agreements violate federal labor law when they require employees, including non-union employees, to waive their right to pursue employment-related class action or collective action claims. Specifically, the Board held that such waivers, required by an employer as a condition of employment, unlawfully force employees to waive substantive legal rights under the National Labor Relations Act (NLRA). This decision, which became official January 3, 2012, could adversely affect current employer agreements and policies requiring such waivers.

In this case, D.R. Horton required its employees to sign an arbitration agreement providing not only that employees submit all employment-related claims to binding arbitration, but also that the arbitrator may only hear individual employee claims. Pursuant to the arbitration agreement, the arbitrator would not have the authority to consolidate an employee’s claims with those of other employees, or to otherwise fashion the proceeding as a class or collective action.

The plaintiff, Michael Cuda, worked for D.R. Horton as a superintendent, was a non-union employee, and filed a notice of intent to arbitrate, on behalf of himself and a nationwide class of superintendents, a claim that they were improperly classified as exempt employees under the Fair Labor Standards Act and thus were entitled to recover unpaid overtime. D.R. Horton replied that the notice of intent to arbitrate was ineffective as the arbitration agreement signed by Cuda barred arbitration of collective claims. Thereafter, Cuda filed an unfair labor practice under the NLRA, claiming that the mandatory arbitration agreement’s waiver of the right to pursue collective or class action claims violated federal labor law.

The Administrative Law Judge who initially heard the case ruled against Cuda, relying generally upon federal court decisions reflecting a strong sentiment favoring arbitration as a means of dispute resolution. The Board reversed that decision, holding that the arbitration agreement violated the NLRA.

Board Concludes that Employees Have the Right to Pursue Claims Collectively
In finding a violation of the NLRA, the Board noted that federal labor law protects employees’ rights to engage in concerted activity not only for the purpose of collective bargaining, but also for “other mutual aid or protection.” The Board held that these protections extended to the right of employees, including non-union employees, to pursue legal action collectively. By requiring employees to waive the right to pursue employment claims in a collective manner, the Board ruled that D.R. Horton had violated its employees’ substantive labor rights under the NLRA.

In reaching its decision, the Board disregarded AT&T Mobility LLC v. Concepcion, a recent 2011 decision in which the U.S. Supreme Court ruled that the Federal Arbitration Act (FAA) preempts state laws that attempt to void class action waiver provisions on public policy grounds. The Board reasoned that the Concepcion decision involved the supremacy of federal law over state law, whereas the case at issue here dealt with a potential conflict between two federal laws, the FAA and the NLRA.

The Board ultimately concluded that finding D.R. Horton’s arbitration agreement unlawful under the NLRA did not conflict with the principles of the FAA, because the intent of the FAA was to leave substantive statutory rights undisturbed. By prohibiting employees from pursuing claims on a collective basis, the Board held that the arbitration agreement unlawfully required employees to waive a substantive statutory right under the NLRA.

Class Action Waivers at Risk?
It is unclear whether federal appeals courts will follow this ruling by the Board, particularly in light of recent federal court decisions upholding class action waivers in the arbitration context. Nevertheless, this decision by the Board presents employers who include such provisions in their arbitration agreements with the potential for a collateral challenge of the waivers through the filing of an unfair labor practice charge under the NLRA.

It is also important to note that the Board affirmed an additional ruling by the administrative law judge that the language of D.R. Horton’s mandatory arbitration agreement violated the NLRA because it required arbitration of all employment-related disputes, and thereby interfered with the right of employees to file unfair labor practice charges with the Board. Accordingly, when drafting arbitration agreements, employers should consider including language expressly exempting from the agreement’s scope the filing of complaints with governmental agencies such as the National Labor Relations Board.

For more information on the matters discussed in this Locke Lord QuickStudy, please contact one of 
Locke Lord’s Labor & Employment Practice attorneys.