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NLRB Restricts Use of Employment Class Arbitration Waivers (Updated Jan. 9)

In a decision that limits the U.S. Supreme Court’s ban on contractual waivers of the right to participate in class arbitrations, the National Labor Relations Board Friday announced that employers can’t force their workers to give up all class claims as a condition of employment.

D.R. Horton Inc. and Michael Cuda, Case 12-CA-25764, found that the employer's class arbitration waiver prevents employees from exercising their right to “to engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection” under Section 7 of the National Labor Relations Act (29 U.S.C. Sec. 157).

Last spring’s Supreme Court decision, AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011)(available here), backed the use of class arbitration waivers in consumer contracts in the context of cellphone contracts.  The Court held that California state consumer protection law interfered with the Federal Arbitration Act. 

On Friday, the NLRB announced that the federal protections for organized work activities must coexist with FAA, distinguishing AT&T Mobility, and class arbitration waivers that cut off collective action won’t stand.

Moreover,the NLRB’s ruling will apply beyond the executive agency’s traditional focus on unionized workers, to white-collar employees in private companies, who also have the right to act together without employer interference under NLRB Section 8.  The ruling doesn’t apply to government employees or management.

Just hours after the NLRB announced the decision on Friday, the New York Times noted that the case “will no doubt anger many companies.”  See coverage here.

"The decision is so sweeping," says Jay Waks, a partner in New York's Kaye Scholer who advises management on employment policy.  In considering options on advising clients, he says he is focusing on, among other things, "the implication of simply carving out from an arbitration agreement with employees the possibility of permitting employees to participate in a court class action, but not an arbitration class action," in accordance with D.R. Horton.

Plaintiffs' attorney Cliff Palefsky, name partner in San Francisco's McGuinn, Hillsman & Palefsky and the author of an amicus brief on behalf of the Service Employees International Union urging the NLRB to invalidate the class waiver in the case, says the decision will be tough to be appeal.  "When you think about it," Palefsky says, "employers can't prevent you from bringing a class action.  Why is this even a question?"

Palefsky has another case before the NLRB on the same issue, and has been pursuing the class waiver issue before the NLRB's general counsel for years.

But both Palefsky and Waks expect that the case will be the subject of a petition to the federal courts for review.  In an article updated today on, Ogletree, Deakins, Nash, Smoak & Stewart partner Ron Chapman Jr., in Dallas, notes that the decision is contrary to the FAA and Supreme Court rulings.  He told Corporate Counsel in a written statement that "if the decision were left to stand, it would merely encourage wasteful, frivolous class and collective actions that primarily serve the interests of plaintiffs' lawyers, not workers."

The D.R. Horton case arose in the midst of a furious Beltway and cable news controversy over the NLRB.  It actually was decided last Tuesday, the day the term of one of the Board’s five members, Craig Becker, expired.  Becker joined Board chairman Mark G. Pearce in the decision--the sole board participants--as a third board member, Brian Hayes, recused himself from the decision for unspecified reasons. 

The opinion could not have been released the next day without Becker, since the NLRB needs at least three board members to release a decision.

The remaining slots have been vacant, with nominees unconfirmed by Congress. 

On Wednesday, a day after the D.R. Horton decision and the expiration of Becker’s term, President Obama announced three recess appointments to fill the NLRB board vacancies--as well as the chairman of the new Dodd-Frank Wall Street Reform and Consumer Protection Act’s Consumer Financial Protection Board—heating up election year rhetoric on the airwaves.

The opinion remained unannounced until Friday.  The NLRB statement on D.R. Horton, which includes a link to the opinion's full text as well as links to the business and labor amicus briefs, is available here.

D.R. Horton strongly states that it does not affect the FAA and arbitration rights, nor does it bar employers from requiring individual arbitrations for their workforces. 

In its order, the board barred D.R. Horton, a Fort Worth, Texas -based home builder, from “[m]aintaining a mandatory arbitration agreement that employees reasonably could believe bars or restricts their right to file charges with the [NLRB and] . . . waives the right to maintain class or collective actions in all forums, whether arbitral or judicial.”

The concern is that by eliminating employees' ability to pursue claims jointly, their NLRA rights would be cut off.  The board said those concerted-action rights were not procedural, but substantive.

The result is that companies will have to alter their employment arbitration requirements.  The opinion is clear that arbitration programs can continue, but the NLRA requires the ability for employees to use collective actions, either in court or ADR.

The 14-page opinion and order--tracing the history of the NLRA and its predecessor, the Norris-LaGuardia Act (29 U.S.C. Sec. 101 et seq. (1932)), as well as the FAA--notes that “an agreement requiring arbitration of any individual employment–related claims, but not precluding a judicial forum for class or collective claims, would not violate the NLRA, because it would not bar concerted activity.”

"D.R. Horton does not bear on the validity fo arbitration clauses in general," says Kaye Scholer's Jay Waks. "The right to require employees to consent to arbitration employment disputes is well established.  This focuses on the validity of class action waivers, whether or not contained in arbitration."

Charging party Michael Cuda stated in his original unfair labor practices complaint that D.R. Horton violated his rights in rejecting his arbitration demand, which he filed under a “Mutual Arbitration Agreement.”   The agreement excluded consolidated and class claims.  Cuda contended that the company was misclassifying the superintendents as exempt from the Fair Labor Standards Act protections, according to the NLRB opinion.

--Russ Bleemer, Editor, Alternatives