Last week the U.S. Court of Appeals for the Fifth Circuit delivered welcome news to employers and practitioners of labor and employment law. After years of heated debate regarding whether employers are permitted to use bilateral arbitration to resolve employment disputes, the Fifth Circuit answered with a resounding “yes.” In D.R. Horton, Inc. v. NLRB, No. 12-60031 (5th Cir. Dec. 3, 2013), the Fifth Circuit reversed the National Labor Relations Board’s (“NLRB”) 2012 ruling and held that employers and employees are permitted to resolve disputes through individual rather than class or collective arbitration.
Laying The Groundwork – The NLRB’s Decision
As we wrote about here last year for Washington Legal Foundation, in this case, a former employee of D.R. Horton filed an unfair labor practice charge with the NLRB, alleging that a class action waiver contained in his arbitration agreement with D.R. Horton violates the NLRA. Based on the employee charge, the NLRB’s General Counsel issued a complaint alleging that D.R Horton’s arbitration agreement violated Section 8(a)(1) of the NLRA by infringing the right of D.R. Horton’s employees to exercise their rights under Section 7 of the NLRA, which provides that employees may “engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection.”
In a two-member majority of the three-member Board, the NLRB held that because the arbitration agreement directly infringes on the substantive Section 7 rights of D.R. Horton’s employees, it necessarily fails. The Board rejected the suggestion that Section 7 rights are procedural and not substantive. The Board drew a critical distinction between the process of certifying a class of employees (which it conceded is procedural in nature) and the “collective action inherent in seeking class certification,” which it held is a substantive right under Section 7.
The Fifth Circuit’s Ruling
D.R. Horton appealed the NLRB’s ruling to the Fifth Circuit and asserted that the NLRB’s holding conflicts with the principles embodied within the Federal Arbitration Act (“FAA”) and that such holding is not required by the National Labor Relations Act (“NLRA”). In response, the NLRB argued that the FAA’s savings clause forbids employment agreements that prohibit class or collective proceedings. The NLRB also argued Congress implicitly superseded the FAA by enacting the NLRA and the Norris-LaGuardia Act.
A split panel overturned the NLRB’s decision and held that the NLRA does not override the FAA. In reaching its decision, the Fifth Circuit relied on the plain language and legislative history of the FAA and the NLRB. The court stated that the FAA provides that except for very limited circumstances, arbitration agreements must be enforced according to their terms. Likewise, according to the NLRA, courts cannot refuse to enforce an employer’s agreement with an employee to participate in arbitration only on an individual basis. Despite the fact that the Fifth Circuit gave judicial deference to the NLRB’s decision, the court explained that in this case, deference to the NLRB could “potentially trench upon federal statutes and policies unrelated to the NLRA.” Thus, the Fifth Circuit held that requiring an employer to allow class or collective arbitration violates the FAA and denies employers the benefits of arbitration.
Implications For Employers
The Fifth Circuit’s ruling strengthens employer’s argument that individual-only arbitration agreements are enforceable. This pro-arbitration ruling is a definite victory for employers. Along with this triumph, however, employers should pay cautious attention to the Fifth Circuit’s warning that an agreement to arbitrate cannot mislead employees to believing they were prohibited from filling a complaint with the NLRB. Thus, employers are well suited to review and revise arbitration agreements where necessary.