Last year, in AT&T Mobility v. Concepcion, the Supreme Court upheld a class arbitration waiver in a consumer contract. Now, however, the National Labor Relations Board has struck down a similar waiver in the employment context, holding that requiring employees to submit all employment-related disputes to individual arbitration is an unfair labor practice.
In D.R. Horton, Inc. and Michael Cuda, an employer mandated that all employees sign a Mutual Arbitration Agreement (“MAA”). The MAA provided that employees would submit all employment-related disputes to final and binding arbitration, that the arbitrator could hear only individual claims, and that employees waived the right to resolve employment-related disputes in civil proceedings. In other words, the MAA prohibited employees from pursuing employment-related claims collectively.
Michael Cuda, a superintendent for homebuilder D.R. Horton, asserted that D.R. Horton had misclassified him as exempt under the Fair Labor Standards Act. He notified D.R. Horton that he intended to initiate arbitration on behalf of a nationwide class of similarly situated superintendents. D.R. Horton responded that the notice of intent to arbitrate was defective because the MAA prohibited collective arbitration. Cuda filed an unfair labor practice claim with the NLRB, alleging that prohibiting collective arbitration violated the employees’ right to engage in concerted activity under the National Labor Relations Act.
The NLRB agreed. The Board stated, “Section 7 of the NLRA vests employees with a substantive right to engage in specified forms of associational activity.” This protected activity includes joining together to address workplace grievances through collective arbitration or class action litigation. The MAA, the Board ruled, interfered with this substantive right by prohibiting employees from bringing collective claims in any forum, judicial or arbitral. As a result, requiring employees to sign the MAA as a condition of employment was a prohibited unfair labor practice.
The Board stated that its decision did not conflict with the Federal Arbitration Act. The Board reasoned that the FAA places private arbitration agreements only on the same footing as other contracts, and no private employment contract, including an arbitration agreement, can conflict with federal labor law. The Board pointed to the prohibition of “yellow dog” contracts – contracts forbidding employees from joining unions – as an example of this limitation on employment contracts. The analysis does not change simply because the contractual provision at issue deals with arbitration. As a result, an arbitration agreement – like any other contractual provision – must fail when it is contrary to federal labor law.
The Board stated that its decision is not inconsistent with the Supreme Court’s decision in Concepcion. In that case, the Supreme Court upheld a class action waiver in a consumer arbitration agreement, ruling that the FAA preempted state law that considered such waivers unconscionable. The Board distinguished Concepcion as involving a conflict between federal and state law, thereby invoking the Supremacy Clause. D.R. Horton, on the other hand, involved a possible conflict between two federal laws. Furthermore, the Board said, Concepcion involved consumer arbitration agreements, not federally protected employment and labor rights. Finally, the Board held that employers can restrict arbitration to individual claims as long as they do not similarly restrict civil litigation claims, easing the efficiency and fairness concerns raised in Concepcion.
The Board emphasized that its ruling applies only to NLRA-defined “employees” who are not already exempted from the FAA, and thus is not a sweeping invalidation of all arbitration agreements in employment contracts. Nevertheless, the NLRB decision will not be the last word on the issue, as D.R. Horton has filed a notice of appeal in the Fifth Circuit. Stay tuned to find out if the Fifth Circuit comes to a similar reconciliation between the FAA and federal labor law.