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Mandatory “No-Class Action” Arbitration Waivers Interfere with Employee Rights, NLRB Rules

  • January 10, 2012

Requiring individual employees as a condition of employment to sign arbitration agreements waiving their right to bring joint, class or collective actions, both in arbitration and in the courts, violates federal labor law, the National Labor Relations Board has held.  The National Labor Relations Act, the Board said, confers on employees the right to pursue discrimination, wage and hour and other workplace-related claims in a joint, class or collective fashion as “protected concerted activity.”  In D.R. Horton, 357 NLRB No. 184 (Jan. 3, 2012), the Board held that “employers may not compel employees to waive their NLRA right collectively to pursue litigation of employment claims in all forums, arbitral and judicial.”  As the agreement in the case before it did just that, the agency found the agreement violated the statute, and ordered it rescinded or revised.  The Board also concluded that the agreement violated the NLRA for the added reason that its language, which barred employees from starting “lawsuits or other civil proceedings” relating to their employment, would lead employees reasonably to believe that they were prohibited from filing unfair labor practice charges with the Board.

By no means, the Board asserted, does the decision ban all arbitration agreements with new and existing employees.  “Employers remain free to insist that arbitral proceedings be conducted on an individual basis,” the NLRB affirmed.  “So long as the employer leaves open a judicial forum for class and collective claims,” it continued, “employees’ NLRA rights are preserved without requiring the availability of classwide arbitration.”

The Board also recognized that a union representing employees in collective bargaining could waive individual unit employees’ rights to pursue statutory claims in court, as the Supreme Court held in 14 Penn Plaza LLC v. Pyett, 556 U.S. 247 (2009), maintaining that collective bargaining itself is a form of statutorily protected activity. But these waivers, it said, were different from the unilaterally imposed employment policies before it in D.R. Horton.
Private sector employers that have implemented any type of class or collective waiver in arbitration agreements or other plans (such as commission agreements) should consider reviewing the numerous issues in consultation with counsel to determine whether to modify such agreements in light of the NLRB decision.

The Facts

Employees in D.R. Horton, as a condition of employment, were required to sign a “Mutual Arbitration Agreement” that all employment-related disputes had to be resolved through individual arbitration and that the right to a judicial forum was waived.  In other words, they could not pursue class or collective litigation of such claim in any forum — arbitral or judicial.  The MAA said that:

  • all disputes and claims relating to the employee’s employment with the company (with some exceptions) would be determined exclusively by final and binding arbitration;
  • the arbitrator could “hear only Employee’s individual claims,” would not have the authority to consolidate the claims of other employees and would not have the authority “to fashion a proceeding as a class or collective action or to award relief to a group of employees in one arbitration proceeding”; and
  • the signatory employee would waive “the right to file a lawsuit or other civil proceeding relating to Employee’s employment with the Company” and “the right to resolve employment-related disputes in a proceeding before a judge or jury.”

The dispute in D.R. Horton arose when counsel for an attorney for an employee (a superintendent) wrote to the company that his firm had been retained by the employee and a nationwide class of similarly situated employees over a claim that the company was misclassifying these employees under the Fair Labor Standards Act.  He said they intended to arbitrate the claim under the MAA.  When the company’s counsel replied that an effective notice of intent to arbitrate had not been provided because the MAA barred collective claims, the lead employee filed a charge with the NLRB.  A complaint was issued, leading to the Board’s decision.

Concerted Action

The Board concluded that the MAA prohibited the exercise of substantive rights protected by the NLRA, noting that the Board has consistently held that concerted legal action addressing wages, hours or working conditions is protected by NLRA section 7.  (Section 7 gives employees the right “to engage in … concerted activities for the purpose of collective bargaining or other mutual aid and protection ….”  The last phrase includes efforts by employees to improve conditions through channels outside their immediate employee-employer relationship.)  It followed, according to the Board, that “[c]ollective pursuit of a workplace grievance in arbitration is equally protected by the NLRA,” even where that grievance/arbitration procedure is created unilaterally.  Forcing employees to resolve disputes individually with their employers, it said, was illegal, even where an employment agreement was entered into without coercion.  Such agreements were proscribed not only by the NLRA, but the Norris-LaGuardia Act as well.

In this regard the Board disagreed with an interpretation by its (former) General Counsel that class action arbitrations often are the “purely personal” actions of a named employee and outside the scope of Section 7.

Federal Arbitration Act

The Board also rejected an argument that the Federal Arbitration Act conflicted with the NLRA in this case.  The FAA, it noted, was designed to place private arbitration agreements on the same footing as other contracts, thus favoring such agreements.  Therefore, the Board countered, any agreement like the MAA is a violation, even if it did not mention arbitration and only required employees, as a condition of employment, to pursue any claim in court on an individual basis.  Moreover, the Supreme Court in interpreting the FAA made clear that an arbitration agreement cannot require a party to forgo the substantive rights of the statute in issue.  Here, according to the Board, “the MAA’s categorical prohibition of joint, class, or collective federal state or [sic] employment law claims in any forum directly violates the substantive rights vested in employees by Section 7 of the NLRA.”  Collective action under the NLRA is not merely a procedural right, ancillary to litigating a substantive right, it said. 

Also, the Board found the Supreme Court’s Pyett decision offered the employer no defense.  Collective bargaining that resulted in a waiver of individual employee rights to pursue employment discrimination claims in court stood on a different footing than an employment policy, such as the MAA, imposed on individual employees as a condition of employment.  Since the MAA’s broad waiver interfered with employees’ substantive NLRA rights, according to the NLRB, there was no conflict with the FAA.

The Board next addressed the Supreme Court’s rationale for upholding a class action waiver in a dispute over a nonemployment-related cellular telephone contract, where the Court relied on “the principal advantage of arbitration — its informality,” AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011).  The Board maintained that in employment cases the class would be much smaller, and so the classwide arbitration would be far less cumbersome “and more akin to an individual arbitration proceeding” in terms of speed, cost, informality and risk.

The panel deciding D.R. Horton included Member Craig Becker on his last day on the Board, but not Member Brian Hayes, who was recused.

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A court challenge to the Board’s decision is anticipated.  The case may even reach the Supreme Court.  It presents an opportunity for the Court to reconcile mandates of the NLRA with the recent trend in Court opinions broadly approving private arbitration agreements.

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