• NLRB Decision Finding Arbitration Agreement Unlawful Affects Unionized and Non-Unionized Employers Alike
  • January 13, 2012 | Authors: John W. Alden; Richard D. Haygood; Robert G. Hensley
  • Law Firms: Kilpatrick Townsend & Stockton LLP - Atlanta Office ; Kilpatrick Townsend & Stockton LLP - Winston-Salem Office ; Kilpatrick Townsend & Stockton LLP - Raleigh Office
  • The National Labor Relations Board (the "NLRB" or the “Board”) has ruled that a mandatory arbitration agreement preventing employees from pursuing class or collective claims against their employer is unlawful under the National Labor Relations Act (“NLRA” or the “Act”).  In D. R. Horton, Inc., the Board held that merely maintaining such agreements with nonsupervisory employees constitutes an unfair labor practice by interfering with nonsupervisory employees’ right, under Section 7 of the Act, to engage in “concerted activities” to affect wages, hours, and other terms and conditions of employment.  The Board further ruled that an arbitration agreement requiring nonsupervisory employees to submit all employment-related claims to arbitration violates the NLRA by leading employees to believe that they may not file unfair labor practice charges with the Board.  While the Board sought to downplay the scope of its ruling, the decision not only may increase the number of class and collective actions filed, but also means that both unionized and non-unionized employers throughout most of the private sector should review, and potentially rewrite, the arbitration provisions contained in their employment agreements, handbooks, and policies.

    The NLRB's Decision in D. R. Horton, Inc.

    In D. R. Horton, Inc., the Board considered an unfair labor practice charge filed by an employee who had been required to execute a Mutual Arbitration Agreement (“MAA”) as a condition of his continued employment with his employer.  Under the MAA, the employer and the employee agreed that all employment-related disputes would be resolved through arbitration and that the employee waived the right to file a lawsuit or other civil proceeding relating to employment.  Moreover, the MAA provided that the arbitrator deciding employment-related claims could hear only the employee’s “individual claims” and had no authority to consolidate the claims of other employees or conduct the arbitration as a class or collective action.  When the employee sought to arbitrate a collective claim that he and other employees had been misclassified as exempt from the wage and hour protections of the Fair Labor Standards Act, the employer objected, citing the language in the MAA prohibiting class or collective claims.  The employee then filed an unfair labor practice charge alleging that the MAA’s arbitration provision violated his right under the NLRA to engage in concerted activity.

    At the outset, the Board held that an arbitration agreement requiring employees to submit all employment-related claims to arbitration would mislead employees into believing that they could not file an unfair labor practice charge with the NLRB.  On this basis alone, the Board concluded that the agreement violated the NLRA by interfering with employees’ access to the Act’s protections.  Moreover, noting that the collective pursuit of workplace grievances through litigation has long been considered protected concerted activity under the Act, the Board agreed that the arbitration provision unlawfully restricted the employee’s exercise of his rights under the NLRA.  The Board ruled that the requirement that the employee waive his right to join his claim with the claims of other employees violated the substantive rights of nonsupervisory employees, created by Section 7 of the Act, to band together for “mutual aid and protection” with respect to the terms and conditions of employment.  Citing Supreme Court cases indicating that employees could not be required to enter into agreements that restricted their Section 7 rights, the Board held that these rights were ones that employees could not be required, as a condition of their employment, to contract away.  Seeking to clarify the scope of its decision, the Board emphasized that its ruling on collective claims was limited to those agreements that required employees to waive their rights to pursue employment-related claims collectively in any forum.  The Board suggested that employers might still require employees to agree to arbitrate their individual claims, so long as the agreements did not prohibit employees from instituting or joining a collective or class action in court.

    Practical Implications

    The Horton decision did not involve a unionized employee or an arbitration provision in a collective bargaining agreement.  It is important, therefore, that employers understand that the Horton decision has significance for them whether their workforce is unionized or not.  Most private companies, other than air carriers and railroads, are subject to the NLRA, and that Act's right to engage in concerted activity therefore applies broadly to nonsupervisory private-sector employees, regardless of whether those employees are represented by a union.  Furthermore, given the widespread use of arbitration provisions in employment agreements and handbooks, the scope of this decision cannot be understated.  Arbitration agreements and policies typically establish arbitration as the exclusive means of resolving "all employment-related claims" or "all claims between the employer and the employee," and carve-outs expressly preserving an employee’s right to file a charge with the NLRB or other governmental agency are relatively rare.  As such, this decision may render most arbitration agreements with employees unlawful on the basis that such expansive language about their scope will necessarily mislead employees into believing that they are prohibited from filing an unfair labor practice charge with the NLRB.  In addition, the Horton decision renders arbitration agreements unlawful under the NLRA if they do not permit any means of asserting class, collective, or joint claims relating to employment matters.  It is worth noting that merely maintaining such an arbitration agreement with nonsupervisory employees is unlawful, even if no employee has ever attempted to assert a class or collective claim or been dissuaded from filing a charge with the NLRB.

    To avoid the risks and costs associated with defending potential unfair labor practice charges based on the provisions of an arbitration agreement, employers should revise any arbitration agreements with nonsupervisory employees that include broad, unqualified language requiring that all employment-related disputes be resolved by arbitration or that completely restrict employees’ ability to pursue class or collective actions.  In the wake of the Horton decision, employers should anticipate increased scrutiny of arbitration agreements by the NLRB, and, as these agreements must now leave open the possibility of collective relief in employment disputes, employers can expect to see an increase in the number of class and collective actions filed.  Although the Horton decision is likely to be appealed and may be overturned by the courts, it is currently binding law applicable to all NLRA-covered employers.