In an attempt to avoid costly litigation, employers may require employees to sign arbitration agreements in which employees agree to arbitrate, rather than litigate, their employment-related claims and waive their right to pursue such claims as a class with other employees. Recently, the validity of class action waivers has attracted widespread attention. Last year, in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), the U.S. Supreme Court upheld a class action waiver included in a consumer contract that required customers to individually arbitrate their claims. This year, the National Labor Relations Board (“NLRB”) addressed whether a mandatory arbitration agreement that prevents employees from joining together to file employment-related claims violates federal labor law. In D.R. Horton, Inc. and Michael Cuda, 357 NLRB No. 184 (Jan. 3, 2012), the NLRB held that an employer violated the National Labor Relations Act (“NLRA”) by requiring its employees to sign an agreement precluding them from filing in any forum – arbitral or judicial – joint, class, or collective claims relating to wages, hours or other working conditions.

In this case, the employer, D.R. Horton, required its employees to sign a Mutual Arbitration Agreement as a condition of employment. The agreement required that all employment-related disputes must be resolved through arbitration and that the arbitrator could only hear an individual employee’s claims and did not have the authority to consolidate the claims of other employees. The agreement also provided that the employee waived the right to file a lawsuit and to resolve employment-related disputes in a proceeding before a judge or jury.

Michael Cuda, who worked as a superintendent for D.R. Horton, had signed the agreement as a condition of his employment. Cuda believed D.R. Horton was misclassifying the superintendents as exempt employees under the Fair Labor Standards Act. Cuda’s attorney notified D.R. Horton of the intent to initiate arbitration on behalf of Cuda and a nationwide class of superintendants. In response, D.R. Horton argued that the agreement barred arbitration of collective claims. Cuda filed an unfair labor practice charge with the NLRB, alleging that D.R. Horton violated the NLRA by maintaining the agreement. The NLRB agreed.

The NLRB began its analysis by discussing employee rights that are protected by the NLRA. The NLRA was enacted to allow employees to join together to assert their legal rights to improve workplace conditions and to remedy workplace wrongs. Section 7 of the NLRA provides that employees have the right “to engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The NLRB stated that it has long held that the NLRA protects the right of employees to join together to pursue workplace grievances through litigation and that Section 7 protects concerted legal action addressing wages, hours or working conditions. Therefore, an individual who files a class or collective action regarding wages, hours or working conditions, either in court or through arbitration, is engaging in conduct that is protected by Section 7.

In this case, the NLRB held that the agreement clearly prohibited employees from exercising rights protected by Section 7. As a result, the agreement violated Section 8(a)(1) of the NLRA, which makes it an unfair labor practice for an employer to interfere with, restrain or coerce employees in the exercise of their Section 7 rights.

The NLRB specifically addressed and rejected the argument that its holding was inconsistent with the Supreme Court’s opinion in AT&T Mobility v. Concepcion. The NLRB explained that AT&T Mobility was distinguishable because it involved the waiver of a consumer class action and, therefore, did not involve the waiver of rights protected under the NLRA. Furthermore, AT&T Mobility involved a conflict between a federal statute and state law, which invoked the Supremacy Clause, whereas this case involved two federal statutes.

Finally, the NLRB noted the limited nature of its decision, holding only that employers may not require employees to waive their right under the NLRA to collectively pursue litigation of employment claims in all forums (arbitral and judicial). The NLRB stated that the employees’ NLRA rights are protected without requiring the availability of class-wide arbitration if an employer permits a judicial forum for class and collective claims. In addition, employers may require arbitration to be conducted individually. The NLRB made clear that an agreement that requires an employee to arbitrate individual employment-related claims, but does not preclude a judicial forum for class or collective claims, would not violate the NLRA.

While this case is certainly unfavorable for employers, it is probably not the final word on the issue. It remains to be seen whether courts will uphold the D.R. Horton decision. For example, a possible foreshadowing of how the decision will be treated by the courts is a recent California district court decision, Fatemah Johnmohammadi v. Bloomingdale’s Inc., case number 11-cv-6434, in which the court tentatively ruled that the employee was required to arbitrate her claims. The court found that the D.R. Horton holding does not apply to a wage and hour class action because the employee voluntarily signed the arbitration agreement. In the meantime, employers with such agreements should consider suspending their application until the courts have had their say on the issue. Above all, employees should understand that they are not required, as a condition of their employment, to waive their right to maintain employment-related class or collective actions in all forums or to file charges with the NLRB.