Employers who don’t include arbitration clauses in their employment contracts to prevent employees from filing class actions may want to start. The U.S. Court of Appeals for the Fifth Circuit has handed businesses a powerful weapon in disputes with workers in its decision in D.R. Horton v. National Labor Relations Board.
“It’s an enormous victory for employers because they now have an extremely valuable weapon available to them to fight class and collective action,” said Ron Chapman Jr., a Dallas shareholder in Ogletree, Deakins, Nash, Smoak & Stewart who represents D.R. Horton Inc.
But arbitration agreements preventing class actions take away one of the few legal tactics low-wage workers have against wealthy employers: the power to pursue claims collectively, said Michael Subit, who filed an amicus brief on behalf of the National Employment Lawyer’s Association and numerous organizations representing low-wage employees.
“The most important thing is for those employers who are inclined to abuse their power is [that the Fifth Circuit has] taken away the employees’ most powerful weapon,” said Subit, a partner in Seattle’s Frank Freed Subit & Thomas.
The background to the circuit’s Dec. 3 decision is as follows, according to the 2-1 majority opinion.
D.R. Horton is a large homebuilding company that began requiring all new and existing employees to sign mutual arbitration agreements in 2006.
The agreements provided that Horton and its employees voluntarily waive all rights to trial before a judge or jury on all claims between them; all disputes would be determined exclusively by binding arbitration, including claims for wages, benefits or other compensation; and the arbitrator would not have the authority to consolidate claims of other employees and would not have the authority to hear class action claims.
In 2008, a nationwide class of Horton superintendents sought to initiate arbitration claims that the company had misclassified them as exempt from statutory overtime protections in violation of the Fair Labor Standards Act (FLSA), according to the majority opinion.
Horton responded that the arbitration agreement barred pursuit of collective claims but invited the employees to file individual arbitration proceedings. The employees then filed an unfair labor practice charge, alleging that the class-action waiver in the agreement violated the National Labor Relations Act (NRLA).
In 2011, a National Labor Relations Board (NLRB) administrative law judge held that the agreement violated NLRA §8(a)(1) and (4) because its language would cause employees reasonably to believe that they could not file unfair labor practice charges with the board—a decision an NLRB panel later upheld. The panel also found that the agreement violated the NLRA because it required employees to waive their right to maintain joint, class or collective employment-related claims collectively or as a class, according to the majority opinion.
Horton appealed the NRLB’s decision to the Fifth Circuit.
In its decision, the Fifth Circuit found that the NRLA does not explicitly provide employees the right to pursue collective actions and does not “override” the congressional command under the Federal Arbitration Act, which established a “liberal federal policy favoring arbitration agreements.”
“Neither the NLRA’s statutory text nor its legislative history contains a congressional command against application of the FAA. Therefore, the Mutual Arbitration Agreement should be enforced according to its terms unless a contrary congressional command can be inferred from an inherent conflict between the FAA and the NLRA’s purposes,” wrote Judge Leslie Southwick in an opinion joined by Judge Carolyn Dineen King.
“We do not deny the force of the Board’s efforts to distinguish the NLRA from all other statutes that have been found to give way to requirements of arbitration. The issue here is narrow: do the rights of collective action embodied in this labor statute make it distinguishable from cases which hold that arbitration must be individual arbitration?” Southwick wrote. “We have explained that the general reasoning indicates the answer is ‘no.’ We add that we are loath to create a circuit split.”
Judge James Graves dissented, saying he would have affirmed the board’s decision.
“The Mutual Arbitration Agreement (MAA) precludes employees from filing joint, class or collective claims in any forum,” Graves wrote. “I agree with the Board that the MAA interferes with the exercise of employees’ substantive rights under Section 7 of the NLRA, which provides, in relevant part, that employees have the right ‘to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.’ “
Chapman, who represents D.R. Horton, said there are “two key takeaways” from the ruling.
“For every employer that does not have an arbitration agreement, they should consider adopting one. For every employer that does have an arbitration agreement, they need to update it to ensure that it complies with evolving nuances in this area of the law,” he said.
“NRLB’s position is that employees have a substantive right to pursue collective and class actions. The Fifth Circuit followed Supreme Court precedent that there is no such substantive right,” Chapman said. “In other words, according to the Supreme Court and now the Fifth Circuit, class and collective proceedings are merely procedural, and those proceedings can be waived.”
Kira Dellinger Vol, an NRLB attorney who represented the board at the circuit, declined comment. Gregory King, director of the Office of Public Affairs for the NRLB, said the agency is still reviewing the decision.
The case drew considerable amici attention from numerous organizations representing business and labor interests, including the U.S. Chamber of Commerce and the National Employment Lawyers Association.
“The Horton case is extremely important because it goes to the heart of class action litigation—and not just in employment matters,” said Marshall Babson, counsel in New York’s Seyfarth Shaw, a former member of the NRLB who submitted an amicus brief on behalf of the U.S. Chamber of Commerce. “Really, what we’re talking about is the viability of employee class actions against employers. I think that’s a pretty compelling reason why this case is important.”
But Subit said preventing labor class action claims is troubling.
“There will be lawyers who are willing to represent one person who is underpaid by $100,000 and very few lawyers to represent people who get underpaid a couple thousand dollars,” Subit said.