In a Dec. 3, 2013, ruling, the 5th U.S. Circuit Court of Appeals held that the National Labor Relations Board (NLRB) erred in finding that class-action waivers in arbitration agreements violate employees' statutorily protected right to engage in concerted action protesting the terms and conditions of their employment.
“This is an enormous victory for employers as they attempt to prevent the ongoing onslaught of class-action lawsuits,” Ogletree Deakins' Ron Chapman, the lead attorney for the employer in the case, told SHRM Online.
Arbitration Agreements Prohibited Class Actions
In January 2006, D. R. Horton Inc., a home builder in more than 20 states, began requiring employees to sign agreements that stated that all employment-related disputes would be decided by arbitration. The agreements also said that the arbitrator could hear only an employee’s individual claims, not class actions, and that employees waived the right to file a lawsuit or other civil proceeding relating to employment.
Michael Cuda, who was a superintendent for D. R. Horton, brought a nationwide class action, asserting that the employer misclassified its superintendents as exempt from the protections of the Fair Labor Standards Act (FLSA). The employer replied that Cuda failed to give an effective notice of intent to arbitrate, emphasizing that the agreement barred arbitration of collective claims.
Cuda responded by filing an unfair-labor-practice charge, alleging the arbitration agreement violated the National Labor Relations Act (NLRA). The NLRB agreed, ruling that prohibiting the collective enforcement of legal rights in court or arbitration violated employees’ rights to engage in concerted action protesting the terms and conditions of their employment, as guaranteed by the NLRA. The board rejected D.R. Horton’s claim that a finding that its restriction on class actions violated the NLRA conflicted with the Federal Arbitration Act (FAA).
The board also ruled that the agreement would lead employees to believe that they couldn't file unfair labor charges with the NLRB.
D.R. Horton appealed the NLRB's decision to the 5th Circuit. More than 40 pro-employer and pro-employee organizations filed “friend of the court” briefs. The 5th Circuit heard oral argument on Feb. 5, 2013.
The appeals court overturned the NLRB's decision, concluding that the agency failed to give “proper weight” to the FAA, which requires that arbitration agreements be enforced “according to their terms” unless Congress has specified otherwise. The court found no clear congressional command to the contrary—nothing in the NLRA or its legislative history to suggest that it was intended to prevent employers from adopting class or collective action waivers.
But the court agreed with the board that D.R. Horton must clarify that the arbitration agreement does not preclude employees from pursuing claims of unfair labor practices with the NLRB.
Employers’ Right to Bar Class Proceedings Upheld
Over the past decade there has been a marked increase in class and collective actions filed against employers, usually alleging violations of wage and hour laws, Chapman said. In response, employers have adopted agreements containing class- and collective-action waivers. “The 5th Circuit has validated employers’ abilities to do this,” he explained.
Further, this issue “reaches employers across the country, not just union employers,” said former NLRB General Counsel Ronald Meisburg, an attorney in Proskauer’s Washington, D.C., office. He noted that many employers have agreements similar to those used by D.R. Horton. “This is the first time a court has dealt with this issue.”
But both attorneys urged businesses to proceed cautiously. Chapman reminded employers that “the law in this area evolves over time.” Organizations with arbitration agreements should review them to make sure they comply with current law. And employers considering using such agreements for the first time should make sure that “they do it carefully. Wording is important.” Make sure to include clarifying language that the agreement is not intended to keep employees from filing charges with the NLRB or other government agencies.
And Meisburg noted that this one decision doesn’t finally resolve the issue. “This is just one circuit out of 12,” he said. “The NLRB has jurisdiction for all of the country and probably won’t let the decision in one circuit change its view on how the law will be applied.”
“This is a positive development but not the end of the battle,” Meisburg concluded.
Joanne Deschenaux, J.D., is SHRM’s senior legal editor.