Federal Appeals Court Overrules NLRB: Employers Can Adopt Class Action Waivers Through Arbitration Agreements

Contributed by Jeffrey A. Risch

As previously reported, in January 2012 the National Labor Relations Board (NLRB) held that a nationwide home builder committed an unfair labor practice under the National Labor Relations Act (NLRA) by implementing a mandatory arbitration agreement that waived the rights of employees to participate in class or collective actions through court action.  See D.R. Horton Inc. and Michael Cuda, (357 NLRB 184).  In short, the NLRB held that employers may not compel employees to waive their right to collectively pursue litigation of employment related claims.  On December 3, 2013, the Fifth Circuit Court of Appeals rejected the NLRB’s finding and concluded that the NLRB “did not give proper weight to the Federal Arbitration Act (FAA).”

Michael Cuda, a superintendent for Horton, claimed that he and other similar superintendents for the company were prevented from pursuing a wage and hour class action/collective action under the Fair Labor Standards Act (FLSA); alleging that they were misclassified as exempt employees.  Horton required Cuda and other employees to execute an arbitration agreement whereby they individually agreed to forego class action relief of all types relating to any employee dispute.

The NLRB found that the mandatory arbitration procedure violated Section 8(a)(1) of the NLRA because it interfered with the statutory right of employees to engage in “protected concerted activity for their mutual benefit.”  However, according to the Court, an otherwise valid arbitration agreement (including those in the employment context) must be enforced in accordance with its terms under the FAA.   Additionally, the Court held that absent specific statutory language in the NLRA to override arbitration, an arbitration agreement entered into between two parties should be enforced.  The Court also pointed out that other federal circuits have likewise upheld arbitration agreements containing class action waivers.  See Richards v. Ernst & Young LLP, (9th Cir. 2013); Sutherland v. Ernst & Young LLP, (2d Cir. 2013); and Owen v. Bristol Care Inc., (8th Cir. 2013).

The Court, however, did note that the underlying arbitration agreement could reasonably be understood by employees as precluding them from filing unfair labor practice charges at the NLRB.  It therefore enforced the NLRB’s order that Horton revise the document to allow employees the ability to file administrative charges.

As we have consistently advised clients, an employer may legally compel arbitration (including those that contain class action waivers) through a properly drafted arbitration agreement; but it may not prohibit its employees from filing a charge with the NLRB.  Employers looking to implement or revise employment arbitration agreements should consult with experienced labor and employment law counsel.