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NLRB Administrative Law Judge Expands D.R. Horton; Strikes Down Arbitration Agreement with Opt-Out Provision


December 2, 2013

As we previously reported, in D.R. Horton, the NLRB held that a mandatory arbitration agreement that waives employees’ rights to participate in class or collective actions is unlawful under the National Labor Relations Act (NLRA). Despite being criticized by every federal court that has addressed the issue, the NLRB has continued to rely on D.R. Horton to find unlawful both mandatory and non-mandatory arbitration agreements. Last week, in Kmart Corp., an NLRB Administrative Law Judge (ALJ) not only followed D.R. Horton, but expanded its holding to further restrict the rights of employers to invoke arbitration agreements, even if such agreements contain opt-out clauses. 

Just like the arbitration agreement in D.R. Horton, the agreement in Kmart required employees to submit employment-related disputes to arbitration and prohibited them from participating in class or collective actions related to such claims. Unlike the agreement in D.R. Horton, however, the agreement allowed employees to opt-out by signing a separate acknowledgment within 30 days of receiving the agreement. Also unlike the agreement in D.R. Horton, the agreement specifically stated that it did not preclude an employee from filing charges with the NLRB or other administrative agencies. The agreement also stated that any employee who opted out “would not be subject to any adverse employment action as a consequence.” Approximately 10% of employees chose to opt-out of the agreement.   

Despite these additional protections, the ALJ still found that the agreement violated the NLRA and D.R. Horton. Instead of focusing on the opt-out procedure, the ALJ focused on the irrevocable waiver of future rights after the 30-day period and found the agreement unlawful on that basis. The ALJ also likened the ability to bring a class or collective action to other section 7 activity, stating, “An employer can no more make such a binding agreement…with an individual employee than it can purport to obtain an employee’s agreement to waive irrevocably his or her future right to join a union, go on strike, or file charges with the Board.” According to the ALJ, an employer and employee simply cannot contract around rights that are guaranteed by the NLRA.

In addition to defending the agreement on the basis of the opt-out provision, Kmart argued that two recent Supreme Court cases, CompuCredit v. Greenwood and American Express v. Italian Colors Restaurant, hold that the strong national policy favoring arbitration found in the Federal Arbitration Act (FAA) effectively trumps any NLRA concerns regarding class waivers in arbitration agreements. The ALJ rejected this argument, however, because those cases involved substantive rights under other statutes and not the NLRA. Therefore, because the NLRA contains a substantive right of collective action, the ALJ found D.R. Horton to be consistent with CompuCredit and American Express. The ALJ further endorsed D.R. Horton by finding that neither it nor the NLRA itself evidenced any hostility toward arbitration, and thus, was lawful under the FAA. 

Given that D.R. Horton is still good law and the ALJ was bound to follow it, the outcome in Kmart Corp. is not surprising. For now, the NLRB will continue to attack class arbitration waivers even if such agreements contain opt-out provisions and additional language favorable to employees. As such, employers should continue to closely examine the arbitration agreements they issue to their employees. D.R. Horton is still pending on appeal to the 5th Circuit Court of Appeals, and we will continue to monitor the outcome of that case. In the meantime, based on the recent court decisions which we have summarized here, employers should take note that their arbitration agreements fare better in federal district court than before the NLRB. 

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