Flexing its regulatory muscle, on January 3, 2012, the National Labor Relations Board in D.R. Horton, Inc. ruled that mandatory arbitration agreements that require employees to waive the right to file a class or collective action in any forum violated the National Labor Relations Act (NLRA). This decision applies to non-union private employers.

Section 7 of the NLRA broadly permits employees to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” (Emphasis added.) In D.R. Horton, the Board concluded that “employees who join together to bring employment-related claims on a classwide or collective basis in court or before an arbitrator are exercising rights” protected by Section 7 of the NLRA. Thus, the Board concluded that an arbitration agreement that employees were required to sign as a condition of employment, and which banned employees from bringing class or collective actions in a judicial or arbitral forum, interfered with the employees’ exercise of Section 7 rights and, therefore, violated the NLRA. The Board also concluded that the mandatory arbitration agreement substantially restricted the right of employees to file charges with the Board and violated Section 8(a)(1) of the NLRA.

Background

The employer, D.R. Horton, a home builder with operations in more than 20 states, implemented on a corporate-wide basis a mandatory arbitration agreement for current and new employees. The arbitration agreement barred employees from suing in court over employment-related disputes. It also limited both the arbitration proceedings and the arbitrator’s authority to hearing and deciding an individual employee’s claims. “In sum,” the Board found, “all employment related disputes must be resolved through individual arbitration, and the right to a judicial forum is waived. Stated otherwise, employees are required to agree, as a condition of employment, that they will not pursue class or collective litigation of claims in any forum, arbitral or judicial.”

Because the Board also found that employees have a right under the NLRA to assert employment-related claims on a group basis, it found that a mandatory arbitration agreement that denied employees’ any right to bring group claims violated the NLRA.

To remedy the violation, D.R. Horton was ordered to post a notice in all locations where the arbitration agreement was in effect. D.R. Horton was specifically ordered to inform employees that it will not “maintain a mandatory arbitration agreement that waives the right to maintain class or collective actions in all forums, whether arbitral or judicial” and will not “maintain a mandatory arbitration agreement that employees reasonably could believe bars or restricts their right to file charges” with the Board. Additionally, the company was ordered either to rescind the arbitration agreement or revise the agreement to make it clear to employees that it did not “constitute a waiver” of their “right in all forums to maintain class or collective actions and does not restrict employees’ rights to file charges” with the Board.

More Developments Likely

The legality of D.R. Horton will surely be challenged. It was issued by a two-member panel consisting of Chairman Pearce (D) and Member Becker (D) (whose term on the Board expired on January 3, 2012), as Member Hayes (R) was recused. While the U.S. Supreme Court held in New Process Steel LP v. NLRB, 130 S. Ct. 2635 (2010) that the authority of the five-seat Board to issue final decisions cannot be delegated to a panel with fewer than three members, the Board will likely argue that the matter was delegated to a three-member panel for decision, and that after such delegation, a member of the panel withdrew. Although the Board will be at full five-member strength, given the January 4, 2012 recess appointments by President Obama of Deputy Labor Secretary Sharon Block (D), union lawyer Richard Griffin (D), and NLRB counsel Terence Flynn (R), it is unlikely that the full Board will overturn the decision. More likely, the federal courts will be called upon to decide the legality of the Board’s decision, both for this procedural reason and because the decision represents a significant expansion of the NLRB’s authority.

Further litigation is also expected to address several questions that the Board specifically did not decide in D.R. Horton, namely, whether an arbitration agreement that allowed class or collective actions to proceed only in arbitration but not in court were legal, or whether an employer can enter into an agreement with an employee to resolve all disputes in arbitration rather than in court. Settlement agreements with individual employees — or even class action representatives — that waive rights to participate in class or collective actions may be challenged now under the decision.

Future litigation may also seek to clarify an apparent inconsistency in the decision, as on one hand the Board recognized Section 7 rights of employees “to bring employment-related claims on a classwide or collective basis in court or before an arbitrator,” while on the other hand the Board observed that “So long as the employer leaves open the judicial forum for class and collective claims, employees’ NLRA rights are preserved without requiring the availability of classwide arbitration.”

What Horton Means for Employers

The D.R. Horton ruling has wide-reaching implications for all private, non-union employers that are subject to the jurisdiction of the Act. Not only does the decision indicate the Board’s clear intention to continue to regulate non-unionized employers, it may require a wholesale change in the way in which employment arbitration agreements are drafted and implemented. Essentially, it means that employers cannot require their employees to sign arbitration agreements that (a) waive the employees’ right to sue in court, and (b) preclude them from filing employment-related claims on a group basis.

Employers should review their arbitration agreements to determine if they include a waiver by employees of their right to participate in a class or collective action and seek legal advice if they do. At a minimum, arbitration agreements should expressly provide that employees are not prevented from filing a charge with the National Labor Relations Board, or other similar federal agency, just as they are not prevented from filing charges with the EEOC.

The Board, even with only two members deciding the question, issued a decision that certainly gives employers plenty to consider in the new year.