NLRB Strikes Down Mandatory Arbitration Agreements Preventing Class Action, What Should Employers Do?

By Hanok George, Albany Government Law Review

On January 3, 2012, in D.R. Horton, Inc. and Michael Cuda, the National Labor Relations Board (NLRB) ruled that certain mandatory arbitration agreements that prevent employees from filing group or class actions in a judicial forum violates the National Labor Relations Act (NLRA).[1]  The ruling essentially bans employment agreements used by many companies that require employees to individually arbitrate all work-related claims.[2]  The Board’s ruling significantly alters what has become a “common dispute resolution practice for many employers” and is effectively skirting the U.S. Supreme Court’s favorable outlook towards arbitration of employment claims.[3]  Companies are undoubtedly angered by this new decision; many denounced the ruling saying “it is an invitation to vast class action lawsuits on issues that could be resolved out of court.”[4]  It is also argued by the respondent in this case and by supporting amici that this decision is in conflict with the Federal Arbitration Act (FAA).[5]  However, the Board holds that its ruling is not in violation of either statute.  In light of this decision, what should employers do to protect their arbitration agreements?

The case ascertains the validity of a “Mutual Arbitration Agreement” (MAA) that was required of all new and current employees as a condition of their employment.[6]  The MAA provided in relevant part that: (1) all disputes and claims relating to employment must be determined exclusively by final and binding arbitration, (2) the arbitrator may only hear employee’s individual claims, and does not have the authority to hear a proceeding as a class or collective action, and (3) that the employee waives the right to file a lawsuit or other civil proceeding relating to the employment and also waives the right to a proceeding before a judge or jury.[7]  “In sum, pursuant to the MAA, all employment-related disputes must be resolved through individual arbitration, and the right to a judicial forum is waived.”[8]  The Board explained that the NLRA vests employees with a right to engage in “‘concerted activities for the purpose of collective bargaining or other mutual aid or protection. . . .’”[9]  Therefore, because the MAA prevented employees from bringing collective or class claims in any forum, the Board held that it is in violation of the NLRA.[10]

The Board specifically explained that its decision creates no conflict between Federal labor law and the FAA.[11]  Firstly, its explained that its decision was not based simply on the issue of the employer requiring arbitration on all employment claims; instead it rested on the fact that the MAA required employees to undergo arbitration on an individual basis and not in a joint, class, or collective fashion.[12]  Secondly, it explained that its decision does not conflict with the FAA because the MAA “interferes with substantive statutory rights under the NLRA, and the intent of the FAA was to leave substantive rights undisturbed.”[13]  Thirdly, it determined that the FAA allows any arbitration agreement to be invalidated for any “grounds as exist at law or in equity for the revocation of any contract.”[14]  The Board argued that this language in the FAA allows the Board to invalidate this type of contract because the “NLRA manifests a strong federal policy protecting employees’ right to engage in protected concerted action, including collective pursuit of litigation or arbitration.”[15]  It also determined that the NLRA has a strong “policy against agreements in the nature of yellow-dog contracts” that require employees to sign away their rights to engage in collective action.[16]  Finally, the Board ruled that even if there is a direct conflict between the NLRA and the FAA, the FAA may have to yield under the Norris-LaGuardia Act – passed 7 years after the FAA – which made unenforceable any “private agreement that seeks to prohibit a ‘lawful means [of] aiding any person participating or interested in’ a lawsuit arising out of a labor dispute (as broadly defined) . . .”[17]

The Board concluded by finding that the employer had violated the NLRA “by requiring employees to waive their right to collectively pursue employment-related claims in all forums, arbitral and judicial.”[18]  Among other things, the Board required the employer to either rescind or revise the MAA to make it clear to employees that their “agreement does not constitute a waiver in all forums of their right to maintain employment-related class or collective actions.”[19]

Is the Board correct in its decision to invalidate such mandatory arbitration clauses?  Many disagree.  Marshall B. Babson, a former labor board member stated that, “The National Labor Relations Act was not intended to be a ‘super class action statute’ that protects and preserves the right to proceed as a class in all circumstances without regard to the usual considerations by the court.”[20]  Also in contention is the Board’s holding that the Supreme Court decision of AT&T Mobility v. Concepcion does not apply in this case.[21]  In AT&T, the Supreme Court rejected the use of a class-action waiver in an arbitration clause because it hindered the process of arbitration by requiring sacrifices on its informality, speed, costs, and associated risks.[22]  One of the ways that Board’s decision attempts to resolve this conflict is by claiming that the situation is different with rights protected by the NLRA and employment agreements, as it tends to be “far less cumbersome and more akin to an individual arbitration proceeding.”[23]  It is uncertain how successful their argument is.  In the alternative, the Board suggests that employers can allow the use of arbitration in individual claims and allow the use of the judiciary in joint, class or collective claims.[24]  The increased expense that such a system will create is undoubtedly a large concern for employers.

Due to the complicated nature of the Board’s arguments and “tangled web of federal, state and local statutes – as well as decisional law – that this ruling implicates,” there is little doubt that this case is likely to be appealed to a federal court of appeals and the issue might wind up in front of the Supreme Court in a few years.[25]  In the meantime, employers who currently have mandatory arbitration agreements in place should examine its language to determine whether it restricts joint, class-based or collective claims – unless the agreement is the result of collective bargaining.[26]  Careful consideration, after consultation with counsel, must be made regarding how employers wish to deal with individual claims and collective claims, and they may have to “provide for a carve-out of joint, class and collective claims from the obligation to arbitrate.”[27]  It is important to note that this decision does not ban agreements that require employees to use arbitration to settle disputes, but requires employers to offer some method for employees to make joint, class and collective claims, either in arbitration or in court.[28]


[1]  D.R. Horton, Inc., 357 N.L.R.B. 184 (Nat’l Labor  Relations Bd. Jan. 3, 2012), available at http://mynlrb.nlrb.gov/link/document.aspx/09031d458079f1de [hereinafter Horton].

[2]  See Steven Greenhouse, Labor Board Supports Class Action For Workers, N.Y. Times, Jan. 7, 2012, at B1, available at http://www.nytimes.com/2012/01/07/business/nlrb-backs-workers-on-joint-arbitration-cases.html.

[3]  David L. Hoskins & James K. L. Lawrence, NLRB Finds Mandatory Arbitration Agreements Which Preclude Class and Collective Claims Unlawful, Lexology (Jan. 12, 2012), http://www.lexology.com/library/detail.aspx?g=3f18a641-e357-404a-8cce-bcdc63dd52b6.

[4]  Editorial, Rights in the Workplace, N.Y. Times, Jan. 15, 2012, at SR10, available at http://www.nytimes.com/2012/01/15/opinion/sunday/rights-in-the-workplace.html.

[5]  See generally, Horton 357 N.L.R.B. 184, at *1.

[6]  Id. at *1.

[7]  Id.

[8]  Id.

[9]  Id. at *2 (citing 29 U.S.C. §157 (2006)).

[10]  Id. at *17.

[11]  Id. at *11.

[12]  Id.

[13]  Id.

[14]  Id. (citing 9 U.S.C. § 2 (2006)).

[15]  Id.

[16]  Id.

[17]  Id. at *12.

[18]  Id. at *13.

[19]  Id.

[20]  Greenhouse, supra note 2.

[21]  Id.; see also, Horton 357 N.L.R.B 184, at *12 (citing AT&T Mobility v. Concepcion, 131 S.Ct. 1740, 1751-1753 (2011)).

[22]  See AT&T Mobility, 131 S.Ct. at 1751-53.

[23]  Horton,357 N.L.R.B. 184, at *12.

[24]  See id. (“So long as the employer leaves open a judicial forum for class and collective claims, employees’ NLRA rights are preserved without requiring the availability of classwide arbitration.  Employers remain free to insist that arbitral proceedings be conducted on an individual basis”).

[25]  Caroline Dellatore et al., NLRB Rules Class Action Waivers Imposed as Condition of Employment In Mandatory Pre-Dispute Arbitration Procedure Are Unlawful, Proskauer (Jan. 11, 2012), http://www.proskauer.com/publications/client-alert/nlrb-rules-class-action-waivers-imposed-as-condition-of-employment-in-mandatory-pre-dispute-arbitration-procedure-are-unlawful/.

[26]  Id.

[27]  Hoskins and Lawrence, supra note 3.

[28]  Id.

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Filed under Constitutional Law, Employment Law, Uncategorized

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