About a month ago, a federal court of appeals located in Louisiana (one step below the U.S. Supreme Court) issued a decision cheered by employer groups as another major defeat for the National Labor Relations Board (“NLRB”). The case involved the legality of collective and class actions waivers contained in employee arbitration agreements. In layman’s terms, the court looked at whether a group of employees who executed valid arbitration agreements during their employment were prohibited from pursuing their dispute as a collective or class action. Collective and class actions—where one or a few sue on behalf of a larger group—can be tremendously expensive (read dangerous) for employers. As we reported last week on our Twitter page, Roto-Rooter recently paid more than 14 million to settle a collective action alleging failure to properly pay wages. Not surprisingly, employers may try to limit this liability through arbitration agreements. According to the NLRB, employers cannot do this. According to the federal appeals court, they can. The decision can be found here: D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344 (5th Cir. 2013).
A quick review of arbitration agreements might be useful before commenting on the court’s decision. An arbitration agreement is a contract that requires employees to bring employment-related legal claims to arbitration, rather than filing a lawsuit in court. Unlike civil court, where cases are decided by judges and juries, an arbitration takes place before one or more arbitrators who issue a decision that is difficult to appeal. The advantage to employers is simple: arbitrations are far less expensive when compared to defending a lawsuit in court. (Contact a Skoler Abbott attorney if you’re interested in using arbitration agreements in your employment setting.)
The D.R. Horton case involved an employer who required all employees to sign a “Mutual Arbitration Agreement” as a condition of employment. The agreement provided that “all disputes and claims” would be determined by binding arbitration, including claims for wages, benefits and compensation. The agreement also provided that the arbitrator would not have the authority to consolidate the claims of other employees or fashion a proceeding as a class or collective action. In essence, these provisions meant that employees could not pursue class or collective claims in an arbitral or judicial forum. Instead, all employment-related disputes were to be resolved through individual arbitration.
A group of D.R. Horton employees disregarded the agreement and attempted to initiate a collective action. The employees claimed they were misclassified as exempt under wage/hour law and owed significant unpaid overtime. D.R. Horton responded that the waiver in the arbitration agreement barred such a collective claim. The employees countered that the waiver violated the National Labor Relations Act (“NLRA”) because it restricted employees from collectively seeking to improve working conditions through group action. (We discussed the basics of an employee’s right to engage in group activity here.)
The NLRB sided with the employees. The Board determined that the class action waiver infringed on the employees’ right to join together as a group and pursue workplace grievances. D.R. Horton appealed to the federal appeals court arguing that the Board’s decision was inconsistent with a federal law—the Federal Arbitration Act—which requires an arbitration agreement to be strictly enforced according to its terms. The court of appeals agreed with the employer and reversed the NLRB’s decision. The gist of the Federal Arbitration Act is that rigid enforcement of an arbitration agreement can only be avoided in exceptional cases, and the circumstances here did not meet that standard.
The takeaway for employers? Consider requiring employees to sign similar arbitration agreements that waive their right to bring class and collective actions. One caveat for local employers: the D.R. Horton decision is only binding in cases brought in the Fifth Circuit Court of Appeals, which covers Louisiana, Texas and Mississippi. There’s no guarantee that federal courts of appeals closer to home would come to the same decision, but we think it is likely.