Why it matters: The infamous D.R. Horton decision from the National Labor Relations Board (NLRB) lives on, with an administrative law judge (ALJ) recently striking down Kmart’s arbitration agreement. Despite the inclusion of a 30-day opt-out period, the ALJ ruled that the agreement’s waiver of any class or collective actions was in violation of the National Labor Relations Act as interpreted by D.R. Horton. While some federal courts have declined to follow the D.R. Horton decision, the Kmart ruling reinforces for employers that some judges are strictly enforcing the precedent.

Detailed Discussion

A complaint was issued by the NLRB against Kmart based upon an arbitration agreement implemented in April 2012 for all employees nationwide. The agreement prohibited employees from “filing, opting into, becoming a class member in, or recovering through a class action, collective action, representation action or similar proceeding,” with a complete waiver of all class, collective, and private attorney general actions.

The company also included an opt-out, however. Employees were given 30 days to elect not to be bound by the arbitration agreement. Evidence was presented that of the more than 84,500 Kmart employees in the United States, about 8,500, or roughly 10 percent, chose to opt out.

Administrative Law Judge David I. Goldman immediately turned to the seminal 2012 decision from the National Labor Relations Board in D.R. Horton, Inc. In that case, the Board held that an employer’s arbitration agreement that included a prohibition from class or collective actions violated the National Labor Relations Act (NLRA).

According to the Board, the redress of collective grievances is “not peripheral but central to the Act’s purposes,” and struck down that policy.

Kmart’s “one-time initial window of opportunity” to opt out of the company’s policy did not save it from a similar fate, Goldman wrote. While employees may enter into individual agreements with their employers, they may not do so at the expense of their substantive rights under the NLRA, he said.

“The problem is not the feasibility of the opportunity to opt out,” the ALJ wrote. “The issue is whether an employer and an individual employee may enter into an agreement to waive irrevocably future rights protected by the Act.”

Employers cannot contract away an employee’s substantive right to engage in the collective redress of grievances, just as employers may not obtain a waiver for an employee’s future rights to join a union, go on strike, or file charges with the Board, the judge said.

Goldman found Kmart’s argument that employees who declined to opt out voluntarily accepted the terms of the agreement unavailing. “[T]he voluntariness of [Kmart’s] policy is debatable: an employee can be bound by the policy if he fails to respond to (or learn of) the arbitration policy and its opt-out provisions.”

Even assuming that the failure to opt out constituted voluntary acceptance, the “inducement to individuals to irrevocably waive future Section 7 rights is not one the employer has the right to provide. It is not a choice employers may purport to enforce. It is not an agreement that an employee may irrevocably make with his employer. In D.R. Horton, the vice was the imposition of a rule barring future collective actions. In this variant, the vice is the agreement between the individual employee and the employer to bar them,” Goldman wrote.

Because employees were required to prospectively and for all time waive their rights under Section 7, the 30-day opt-out period could not save the agreement. “[A]n irrevocable prospective lifetime waiver of certain Section 7 rights relating to all employment disputes that may arise in the future” violates the NLRA, the judge concluded.

Goldman also said the Federal Arbitration Act (FAA) and recent U.S. Supreme Court precedent like American Express Co. v. Italian Colors did not mandate approval of the policy.

“In short, the FAA and its policy preference for arbitration do not privilege enforcement of such agreements when the terms contravene substantive protections under the Act,” he wrote. As for Supreme Court precedent, the judge distinguished the rulings because the statute at issue did not contain a substantive right to collective action – unlike the rights vested in employees by Section 7 of the NLRA.

“[I]t cannot be stressed enough that the Board’s concern in this case, and in D.R. Horton, is not with the FAA or with arbitration,” Goldman explained. “The Board is not hostile to arbitration, but rather, unwilling to countenance any unilateral employer policy, arbitral or otherwise, imposed upon or agreed to with individual employees, that purports to restrict employees’ substantive Section 7 rights, in this case the prohibition on all forms of collective actions in all forums.”

The judge therefore ordered Kmart to rescind or revise its arbitration policy and notify employees accordingly.

To read the ALJ’s decision in Kmart Corp., click here.