NLRB protects class actions, sends employers scrambling

Just when attorneys thought the issue of class action waivers in mandatory arbitration clauses had been settled by the U.S. Supreme Court once and for all, a National Labor Relations Board ruling has called into question the ability of employers to use arbitration clauses in employment contracts to prohibit class and collective actions.

The board’s ruling has employers reviewing their employment contracts to ensure that they are not committing labor law violations.

It also has union- and management-side lawyers debating whether it will be overturned.

“The Federal Arbitration Act allows parties to come to an agreement” about how disputes will be resolved, said Jeffrey A. Risch, a partner in the Chicago office of SmithAmundsen, where he chairs the firm’s Labor and Employment Practice Group. “This decision by the NLRB is stepping on a body of law that it doesn’t have the authority to step on.”

But Cliff Palefsky, a partner in the San Francisco office of McGuinn, Hillsman & Palefsky who represented the workers in the case, said “the ruling itself, as a matter of labor law, is unassailable.”

“The NLRB recognized what has been an unbroken chain of board rulings … confirming the ability of workers to file class action lawsuits as protected activity,” he said.

Class actions: protected concerted activity?

In 2011, the Supreme Court held in AT&T Mobility v. Concepcion that state law could not prohibit companies from compelling consumers to arbitrate disputes individually. The law in question, which required that classwide consumer arbitration proceedings be available, violated the Federal Arbitration Act, the court held.

Some experts suggested that the ruling would bring an end to class actions as attorneys had known them, spurring companies to place binding arbitration clauses barring class proceedings in contracts covering everything from consumer products to employment agreements.

But in its January ruling in D.R. Horton, the NLRB found that a mandatory arbitration clause in an employment contract that precluded workers from filing joint, class or collective claims over their wages, hours or other working conditions violated Section 7 of the National Labor Relations Act.

Such concerted or class claims, the board ruled, constitute protected activity under the act. The board also reasoned that barring class or collective claims in arbitration agreements also violated the Norris-LaGuardia Act, which “protects concerted employment-related litigation by employees against federal judicial restraint based upon agreements between employees and their employer,” the decision said.

The board distinguished Concepcion by noting that it involved a conflict between California state law and the Federal Arbitration Act. D.R. Horton, by contrast, involved the application of two federal statutes, so the preemptive application of the Supremacy Clause was not an issue.

After Concepcion, the use of ironclad arbitration clauses barring class proceedings became standard operating procedure for many companies seeking to avoid class action litigation. And the clauses were not just found in the kind of consumer contracts at issue in Concepcion.

“Many employers rushed to put these kinds of clauses in their agreements to avoid classwide or collective liability from their employees” after Concepcion, said Jennifer L. Liu, an associate in the New York office of Outten & Golden.

The NLRB ruling, which applies to virtually all employers regardless of whether their workplaces are unionized, sent employers and their attorneys sprinting to reevaluate and amend their employment contracts.

The fact that the issue has split the circuits, creating an uncertain area of law unless and until the Supreme Court has its say on the matter, has only made labor lawyers’ jobs tougher.

“It’s hard,” Risch said. “I’m tap dancing because of the uncertainty. I mean, this decision is probably going to get reversed. It’s a bad decision. But am I going to advise my clients to forget about it [and] stick with the arbitration path? No, I’m not doing that.”

Risch noted that the decision does not apply to non-employees.

“If I’m dealing with [contracts with] independent contractors, subcontractors, independent sales representatives and the like, I am still advising my clients about the effective use of arbitration agreements” barring class proceedings, he said.

Politics at play?

Risch, who represents management in labor matters, said he was not surprised that the NLRB took up the issue of arbitration and class proceedings in the wake of Concepcion.

“This is a very politically charged board,” Risch said of the NLRB, which at the time of the ruling had three members and was facing vocal criticisms from business groups and members of Congress for rules and decisions they said were staunchly pro-union and anti-business.

Risch said the D.R. Horton dispute had been pending for a while and gave the NLRB a perfect opportunity to respond to Concepcion.

“When Concepcion came down, the board had this case on its radar.” he said. “When I saw this case coming down the pike, if I were a betting man I would have put a lot of money on the outcome.”

In his view, the board overstepped its authority by holding that classwide litigation — even litigation that may not involve labor disputes — constitutes protected concerted activity under federal labor laws.

But Palefsky disagreed.

“The right to act in concert is a substantive right” under federal labor laws, Palefsky said, adding that collective litigation is included within those substantive rights. “That is hugely significant.”

The board’s reasoning could serve as a bellwether for other cases outside of the context of the NLRA. Courts could adopt the same analysis — that the FAA does not trump class litigation rights under other federal statutes — in cases involving federal laws such as Sarbanes-Oxley, Palefsky said.

“Even the Supreme Court said that you can’t compel arbitration if it is inconsistent with the text of the legislative history of a federal statute,” he said.

But the board’s ruling is not the last word. An appeal in the case has already been filed in the 5th Circuit.