Arbitration Agreements Can Be Used to Avoid Class Claims Under Labor Laws

by Miller Canfield

Employers can avoid class claims by entering agreements that require individual arbitration, but they should review those agreements to ensure that they contain clear exceptions for employees’ right to pursue unfair labor practice charges with the National Labor Relations Board (NLRB or Board), the U.S. Court of Appeals for the Fifth Circuit ruled. 

In D.R. Horton, Inc. v. NLRB, the Fifth Circuit overturned a key Board ruling and held that the National Labor Relations Act (NLRA) doesn’t prevent an employer from including a waiver of all class claims in its arbitration agreements, due to the strong federal policies supporting individual arbitration in the Federal Arbitration Act (FAA).  But the existence of a well-worded arbitration agreement is important. Without it, a mere release or waiver of court-based class-action claims might not be upheld under labor laws, regardless of whether a workplace is unionized. 

Original Board Ruling

The Board panel originally issued an order against Horton, the nation’s largest home building company, concluding that Horton interfered with its supervisor’s right to engage in “concerted activity” to improve working conditions when his arbitration agreement expressly prohibited him from pursuing class actions or class arbitration of wage-and-hour claims. Horton’s other workers signed similar agreements. The Board argued that the agreements violated Sections 7 (concerted activity) and 8 (interference) of the NLRA, which apply to both unionized and non-unionized workplaces.

Horton defended on the grounds that the FAA protected these arbitration agreements, but the Board ruled that the NLRA essentially trumped the FAA for various technical reasons, including a determination that the waivers were illegal contract provisions under the NLRA and, therefore, fell into an exception to the FAA’s protections.

Federal Court Review

Although the SecondEighth and Ninth Circuit Courts had criticized and rejected the Board’s rationale, Horton's business is rooted in Texas, making that court's review of the Board's decision the definitive one, unless the U.S. Supreme Court were to agree to review it. The Fifth Circuit rejected the Board’s position, with one small exception: that the arbitration clause must be clear that it doesn’t prevent unfair labor charges under the NLRA.

The Fifth Circuit reasoned that although the Board’s interpretation of labor law was entitled to deference, Congress spoke with equal power and clarity in the FAA, which was beyond the Board’s special expertise. Under labor law, class litigation is a kind of concerted action, but outside the NLRA, class litigation is simply a procedure, not a right, and is no different than many federal statutory rights and claims that are subject to arbitration under the FAA.

Requiring that class arbitration must be available would make arbitration much less attractive to employers and would require additional formal procedures and protections that defeat the FAA’s central statutory purpose and scheme. Thus, the question was whether the NLRA completely trumps the FAA. According to the Fifth Circuit, it does not. Labor law endorses arbitration, and the Board – as the opponent of arbitration – failed to meet its burden to defeat the arbitration agreements.

The decision signals that employers can properly use arbitration agreements to provide for individual arbitration of disputes and to eliminate class claims, but employers should review those agreements to clarify that they don’t prevent employees from bringing unfair labor charges under the NLRA.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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