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March 2012

Client Advisory: NLRB Rejects Arbitration Class Waivers

In D.R. Horton, 357 NLRB No. 184 (2012), the National Labor Relations Board ("the Board") held that a non-union homebuilder's mandatory arbitration agreement that required individual arbitration of all claims violated Section 8(a)(1) of the National Labor Relations Act (NLRA) since it precluded class or collective action in both an arbitral and judicial forum.

The case arose after an attorney representing an employee (a superintendent) sought to arbitrate a nationwide class action on behalf of all of the employer's similarly situated employees. The attorney alleged that the employer was misclassifying its superintendents as exempt under the Fair Labor Standards Act. The employer refused to arbitrate, citing the language in the mandatory arbitration agreement barring collective claims. An unfair labor practice charge was filed with the Board alleging, in pertinent part, that the employer's mandatory arbitration provision precluding class or collective actions violated Section 8(a)(1) of the NLRA by interfering with the employees' Section 7 rights.

The Board agreed. In so finding, the Board asserted that courts have previously held that Section 7 provides employees the right to join together to pursue workplace grievances, including through litigation or arbitration. Based on this, the Board concluded that "employees who join together to bring employment-related claims on a class-wide or collective basis in court or before an arbitrator are exercising substantive rights protected by Section 7 of the NLRA." The Board then cited the U.S. Supreme Court's opinion in Gilmer v. Interstate/Johnson Lane Corp. (1991) 500 U.S. 20 for the proposition that the Federal Arbitration Act (FAA) permits enforcement of agreements to arbitrate federal statutory claims, including employment claims, only where the agreement does not require a party to "forgo the substantive rights afforded by the statute." Consequently, the Board concluded that because the employer made the arbitration agreement a condition of employment, the employer explicitly restricted activities protected by Section 7, and therefore the arbitration agreement was unenforceable.

The Board distinguished the case from the Supreme Court's recent opinion in AT&T Mobility v. Concepcion, wherein the Supreme Court rejected a claim that a class action waiver in an arbitration agreement service contract was unconscionable under California law and therefore unenforceable as it conflicted with the FAA. The Board asserted that the FAA's purpose was to encourage an alternative forum for dispute resolution that was quicker, less expensive and less formal than traditional judicial cases. The Board further stated that class-wide arbitration of employment disputes was not inconsistent with this purpose, unlike class-action suits in cases like Concepcion, which involved consumer retail service agreements that might have thousands of class-members.

Employers evaluating the potential impact of the D.R. Horton decision on their business should understand that the case is subject to some important limitations:

  • The case only applies to private sector employers covered by the NLRA and not to agricultural employers, government employees, or employees covered by the Railway Labor Act.
  • This holding is only applicable to private sector employers and does not apply to those individuals employed by the employer as a statutory supervisor, manager, or independent contractor.

  • The Board explicitly indicated that employers may require that the arbitration of employment claims be conducted on an individual basis, so long as the employer permits employees to bring class action employment claims in a judicial forum.

  • Similarly, an employer can require the mandatory arbitration of all employment claims, so long as the employee can bring a class-wide employment claim in an arbitral forum.
  • The case did not address whether a mandatory arbitration agreement precluding class-wide arbitration would be enforceable where the employer did not make acceptance of the arbitration agreement a condition of continued employment. Similarly, the case did not address whether a mandatory arbitration agreement precluding class-wide arbitration would be enforceable if the employer provided the employee additional consideration in exchange for agreeing to waive its right to class-wide arbitration.

At this point, employers who have mandatory arbitration agreements precluding class-wide arbitration should not rush out and amend those agreements. First, it is likely that the employer in D.R. Horton will file a lawsuit to challenge the Board's ruling. Thus, this is not settled law and may be overturned. Additionally, in the interim, it is likely that an employee will attempt to challenge the enforceability of a similar arbitration agreement in court, and it is quite possible that the court will find such agreement enforceable under prior Supreme Court and circuit court precedent, irrespective of the Board's holding.

Employment Law

Tara J. Gillman
Gina Haggerty Lindell



Employment Law

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