NLRB Holds Arbitration Agreement Precluding Employees from Filing Claims for Certain Working Conditions Violates NLRA

January 10, 2012

The use of required arbitration agreements with employees who waived class or collective claims has increased in recent years. This is particularly true following the United States Supreme Court’s April 2011 decision in AT&T Mobility v. Concepcion, in which the Supreme Court held that the Federal Arbitration Act (FAA) preempts state laws that bar class action waivers in arbitration agreements. In particular, some employers have valued these provisions as a way to limit the risk of putative collective actions under the Fair Labor Standards Act (FLSA).

A January 3, 2011, decision issued by the National Labor Relations Board (NLRB or “Board”) now puts the use of such arbitration agreements into question. In D.R. Horton, a two-member majority of the Obama Board (Republican Member Hayes recused himself) effectively ignored prior Supreme Court precedent and a 2006 internal opinion of the Board’s General Counsel, and held that such arbitration agreements violate the National Labor Relations Act (NLRA). In doing so, the Obama Board continues its recent trend of expanding the NLRA’s reach into the nonunion employment environment by holding that certain employee activities are protected by the NLRA.

The arbitration agreement at issue in D.R. Horton limited the arbitrator’s authority “to consolidate the claims of other employees” and provided that the arbitrator did not “have authority to fashion a proceeding as a class or collective action or to award relief to a group or class of employees in one arbitration proceeding.” An employee who signed the agreement later sought arbitration on behalf of himself and a nationwide class of similarly situated individuals for alleged violations of the FLSA. The employee then filed an unfair labor practice charge with the Board, challenging the arbitration agreement’s prohibition on class arbitrations.

The Board held that the prohibition violated the NLRA. Specifically, it held that an employee’s filing of a class or collective claim constituted protected concerted activity under Section 7 of the NLRA. That provision grants employees the right “to engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection . . . .” 29 U.S.C. § 157. Consequently, the Board ruled that the arbitration provision’s interference with that conduct violated Section 8(a)(1) of the NLRA, which prohibits employers from interfering with employees’ exercise of their Section 7 rights.

Given the apparent conflict with the United States Supreme Court’s recent Concepcion decision and other Supreme Court precedent expanding the propriety of arbitration agreements under the FAA (including those that limit the right to class treatment), the Board majority spent significant effort trying to explain away a conflict. The Board argued that its decision did not conflict with Concepcion because Concepcion did not involve the NLRA and addressed only the issue of whether the FAA preempted a state law. In contrast, the Board’s decision focused on the interplay of two federal statutes. The Board, then, argued that the right to collective or class claims in employment claims (including FLSA actions) is a substantive rather than a procedural right and that the FAA does not require the waiver of such rights.

The D.R. Horton decision continues the recent trend of expanding the definition of “concerted activity” protected by the NLRA. Essentially ignoring Supreme Court precedent, the Board has taken it upon itself to attempt to outlaw class action arbitration waivers required by most employers. If upheld on appeal, this decision will have a significant impact on employers throughout the country that are neither unionized nor facing any organizing activities. Particularly following the Concepcion decision, many employers were implementing or considering the implementation of arbitration agreements that contained class action waivers.

If you currently use employment arbitration agreements with class action waivers or are considering such agreements, please contact the authors or other members of the McGuireWoods Labor & Employment team.