The Fifth Circuit Allows Class Arbitration Waivers in Employment Agreements

Last week, the Fifth Circuit Court of Appeals joined the Ninth, Second and Eighth Circuits in holding that class arbitration waivers in employment agreements are enforceable, notwithstanding the right of employees to engage in concerted activities under the National Labor Relations Act (NLRA). The ruling has been lauded as an enormous victory for employers, even though the National Labor Relations Board (NLRB) remains free to ignore the opinion and continue to strike down class arbitration waivers.

Under the Mutual Arbitration Agreement (MAA) at issue in D.R. Horton, Inc. v. National Labor Relations Board: (1) employees waived their right to a trial in court; (2) all disputes between D.R. Horton and employees had to be resolved by final and binding arbitration; and (3) the arbitrator did “not have the authority to consolidate the claims of other employees” and did “not have the authority to fashion a proceeding as a class or collective action or to award relief to a group or class of employees in one arbitration proceeding.” The combined effect of these three provisions was that D.R.Horton’s employees could not pursue class or collective claims in an arbitral or judicial forum. Instead, their only recourse for any employment disputes was individual arbitration.

When a former D. R. Horton’s superintendent and a number of similarly situated employees attempted to initiate a nationwide class arbitration arising out of D.R.Horton’s alleged violations of overtime provisions of the Fair Labor Standards Act (FLSA), the company responded that the MAA prohibited a collective arbitration, but that the employees could proceed with individual proceedings. The superintendent then filed an unfair labor practice charge alleging that the class-action waiver violated the NLRA. The (NLRB) agreed and found that the MAA violated Section 8(a)(1) of the NLRA for two reasons. First, it required employees to waive their right to maintain joint, class, or collective employment related actions in any form. Second, the employees could reasonably interpret the language of the MAA as precluding or restricting their right to file charges with the NLRB. Last week, the Fifth Circuit rejected the Board‘s first reason, but agreed with the second.

It explained that while Section 7 of the NRLA creates a right on behalf of employees to “engage in [ ] concerted activities for the purpose of collective bargaining or other mutual aid or protection,” it does not create a substantive right to use class action procedures. In fact, the U.S. Supreme Court and several Circuit Courts of Appeals have previously recognized that there is no substantive right to class or collective procedures under the Age Discrimination and Employment Act or the FLSA. On the other hand, using Section 7 of the NRLA to invalidate an agreed waiver of a class arbitration would violate the Federal Arbitration Act (FAA), which requires that any arbitration agreement be enforced according to its terms. The Fifth Circuit found that neither NRLA’s legislative history nor its language authorized it to override the FAA. Absent an explicit language of a congressional intent to override the FAA in the NLRA, the Act’s mandate that an arbitration agreement must be enforced according to its terms – here, with a class arbitration waiver – must be followed.

Although the Fifth Circuit found that class arbitration waiver provisions do not violate the NLRA, the MAA in this case contained the following language, which did violate the statute: the employee “knowingly and voluntarily waives the right to file a lawsuit or other civil proceeding relating to Employee’s employment . . . .” (emphasis in original). Because this statement would lead employees to reasonably believe that they were prohibited from filing unfair labor practice charges with the NLRB, the Court of Appeals ordered that D.R. Horton should clarify in the agreement that employees retain access to the NLRB regardless of their agreement to arbitrate disputes.

CONCLUSION: While the Fifth Circuit’s rejection of the NLRB‘s ruling in D.R. Horton is lauded as a victory for employers, it does not guarantee that the NLRB will allow the use of class waivers in mandatory arbitration agreements. The Board regularly treats Circuit Court decisions with which it disagrees as non-binding in any other case. Thus, it may continue to reject such waivers despite the ruling.

Although the battle over class arbitration waivers in employment agreements is far from over, all employers need to review their arbitration agreements and make sure that the language used there does not convey the impression to employees that they are prohibited from filing administrative charges with the NLRB.

For more information regarding the enforcement or drafting of arbitration agreements in Texas, contact Leiza Dolghih.

One Comment on “The Fifth Circuit Allows Class Arbitration Waivers in Employment Agreements

  1. As a plaintiff-side employment lawyer, I am predictably displeased with the Fifth Circuit’s opinion but not surprised by the court’s use of the FAA to trump the NLRA. Under the NLRA employees cannot be required to contract away their rights under Section 7, it seems disingenuous that the FAA permits a huge exception when arbitration is concerned.

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