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Fifth Circuit Approves Class-Action Arbitration Waivers in Employment

Author: Kamilah L. Perry

In an anticipated ruling on December 3, 2013, the 5th Circuit Court of Appeals (Texas) held that mandatory class-action arbitration waivers in employment agreements do not violate the National Labor Relations Act (“NLRA”). This decision reverses and invalidates (within the Fifth Circuit) the controversial 2012 decision of the National Labor Relations Board (“Board”) against D.R. Horton, Inc. (“Horton”), a Texas-based homebuilding company, that employers cannot require employees to waive their right to participate in class or collective actions as a condition of employment. D.R. Horton, Inc. v. NLRB, No. 12-60031 (5th Cir. Dec. 3, 2013), available here. 

D.R. Horton required its new and existing employees to sign mandatory employment agreements with arbitration provisions waiving the employees’ right to a jury trial and requiring resolution of all job related disputes through binding arbitration. The arbitration agreement stated that arbitrators would not have the authority to “consolidate the claims of other employees” or “award relief to a group or class of employees in one arbitration proceeding,” thereby requiring all arbitrations to be settled on an individual basis. 

A dispute arose in 2008 when employee Michael Cuda attempted to initiate a class-wide claim against D.R. Horton, alleging that he and several other managerial employees were misclassified as exempt from the Fair Labor Standards Act's overtime pay requirements and denied overtime compensation. Based on the arbitration agreement barring arbitration of consolidated employee claims, D.R. Horton objected to arbitrating Cuda’s claims as a class-action. Accordingly, Cuda filed a claim with the NLRB claiming that D.R. Horton’s employment agreement barring class-action arbitrations violated Section 7 of National Labor Relations Act (“NLRA”) by encumbering employees’ right to act collectively. 

In its 2012 ruling, the Board agreed with Cuda that the NLRA gave employees the right to engage in “protected concerted activity,” which included collective legal actions, and that D.R. Horton’s class-action wavier violated the NLRA by imposing, as a condition of employment, an agreement waiving an employees' “right to pursue employment-related claims in a joint, collective or class manner in any arbitral or judicial forum.” D.R. Horton, Inc., 357 N.L.R.B. No. 184 (Jan. 3, 2012). 

Upon review of the Board’s decision however, the Fifth Circuit Court of Appeals (“Court”) held that the Board focused too narrowly on the objectives of the NLRA to the exclusion of other important federal statutes and policies. Specifically, the Court held that the NLRA did not override the provisions of the Federal Arbitration Act, which gives companies and individuals wide latitude to construct mandatory arbitration agreements as narrowly or broadly as they desire, and that that the use of class-action procedures is not a “substantive right.” The Court also recognized that the NLRA was silent on arbitration agreements between employers and employees, as well as whether such agreements could lawfully waive rights to class actions. As such, the Court found that the Board had not met its burden of showing that the NLRA’s language, legislative history, or purpose was intended by Congress to prevent arbitration agreements from being enforced according to their terms. Accordingly, the Board violated federal law in holding that D.R. Horton was not permitted to bar its employees from seeking class action resolution of employment disputes.

The Court agreed, however, that D.R. Horton’s employment agreement could reasonably be understood by employees to preclude them from bringing unfair labor practice claims before the Board and that agreement should be modified to clarify that such filings were not prohibited.

This 2 to 1 decision is a substantial victory for employers who have been hesitant to adopt employment agreements barring class-action arbitrations until the courts ruled on the largely undecided and unclear issue of whether such waivers were enforceable in the context of employment agreements. The Fifth Circuit joins two other circuits and several district courts that have declined to follow the Board’s ruling in D.R. Horton. See e.g. Richards v. Ernst & Young, LLP, No. 11-17530, 2013 U.S. App. LEXIS 17488 (9th Cir. Aug. 21, 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290 (9th Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013). However, this decision is the first time that a court has had the opportunity to reverse a decision that was directly on appeal from the NLRB, and addresses the NLRB’s decision that has given rise to this issue. 

Despite these recent opinions however, employers should still be prepared to argue in favor of enforcing arbitration agreements with class action waivers because not all jurisdictions have weighed in on the Board’ decision in D.R. Horton, and each circuit court of appeals decision is only binding in the circuit over which it has jurisdiction, leaving uncertainty for employers outside of the Fifth, Eighth and Ninth Circuits. Further, the NLRB generally does not reverse its position based on circuit court disagreement—other than in that circuit—and will continue to follow its D.R. Horton decision in other circuits unless or until the Supreme Court reverses it. Therefore, employers should continue to expect that bans on class-wide arbitration will not be enforced by the NLRB in circuits where the D.R. Horton decision has not been rejected.

Published: December 10, 2013, Phelps Dunbar eLABORate

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