by David Pierce

In a victory for employees, the NLRB recently held in D.R. Horton, Inc., 357 N.L.R.B. No. 184 (Jan. 2012), that an arbitration agreement that prohibits employees from filing class action lawsuits violates the National Labor Relations Act.

In D.R. Horton, the company required employees to sign an agreement that required them to arbitrate their disputes. However, the agreement provided that the arbitrator would not have the power to consolidate claims or award relief on a class basis.

The Claimant’s attorney notified the company that he had been retained to represent a class of employees in a Fair Labor Standards Act case contending that the employees had been improperly classified as exempt and that he wished to arbitrate the dispute. In response, the company cited the class prohibition in the arbitration clause and claimed the notice to arbitrate was ineffective.

The NLRB in a 2-0 decision found that filing a collective or class action claim constituted protective concerted activity which is protected by Sections 7 and 8(a)(1) of the National Labor Relations Act.  Moreover, the Board determined that such an arbitration clause would cause employees to believe they were prohibited from filing an Unfair Labor Practice charge.  Therefore, the Board determined that such arbitration clauses are prohibited. 

The Board’s decision is significant.  It applies to both union and non-union employers. Furthermore, it casts renewed doubt on the utility of employment arbitration clauses as a means of eliminating class action disputes. Such clauses had become more popular in light of a recent U.S. Supreme Court case enforcing an arbitration provision that prohibited class action lawsuits by members of the public. AT&T Mobility v. Conception, 131 S. Ct. 1740 (2011).

Employers are cautioned to have their arbitration clauses reviewed by counsel before asking their employees to sign them.  In addition to problems with clauses that prohibit class actions, courts have found other restrictions in employer/employee arbitration clauses to be unconscionable or unenforceable.   Similarly, companies should carefully consider whether they want to include arbitration clauses as a means of alternative dispute resolution in other business agreements.  This is especially true because the traditional benefits of arbitration (i.e., faster and cheaper resolution) may not be present depending upon how the arbitration provision is drafted.