Divided Sixth Circuit weighs in on class waivers, agrees with NLRB

By Joy Waltemath

By Ronald Miller, J.D.

Adding its voice to the debate, a divided Sixth Circuit agreed with the NLRB that an employer violated the NLRA by barring employees from pursuing class action litigation or collective arbitration of work-related claims. In so ruling, the Sixth Circuit joined the reasoning of the Seventh and Ninth Circuits, and concluded that the Fifth Circuit reached the incorrect conclusion in D.R. Horton, Inc v. NLRB . Of course, the final word on the matter will come from the U.S. Supreme Court, which has agreed to take up the question of whether class and collective action waivers in employment arbitration agreements violate the NLRA, and whether the Federal Arbitration Act (FAA) nonetheless trumps the NLRA. In this decision (resolving a dispute stemming from changes in the compensation of satellite field technicians), Judge Sutton filed a separate opinion concurring in part and dissenting in part (NLRB v. Alternative Entertainment, Inc., May 26, 2017, Moore, K.).

Changes to pay structure. The employee worked as a field technician performing installations for the employer, which provides satellite installation and services for the Dish Network. While he was with the company, the employer made two changes to the compensation structure. First, it required technicians (who were compensated using a “unit-based” compensation system) to meet a minimum dollar amount for additional services (home sales) sold to a customer in order to increase their pay per unit. At first, the employee excelled at home sales, but later determined that he was losing money by spending time on the sales instead of going on more service calls. The second change affected compensation only for technicians who drove their own vehicles: the company would begin compensating technicians based on mileage, not based on units. Under the old system, technicians received a supplement of $0.82 per unit. Under the new system, they were compensated $0.575 per mile. The employee estimated that he would lose $7,000 to $10,000 per year under the new system.

The employee repeatedly voiced his concern about the proposed compensation changes with both management and coworkers. During one such conversation, a manager told him that he was not to talk to other technicians about the pay change. The employee also sent a text message and an email to the company president criticizing the proposed change. Finally, a manager set up a conversation between the company CFO and the employee. The employee explained that he had talked with coworkers, and that he figured the changes would cause him to lose quite a bit of money. Two days following that conversation, he was fired.

The employer required its employees to sign an arbitration agreement requiring them to resolve employment disputes exclusively through binding arbitration. The agreement also stated that claims could not be arbitrated as a class action, and that a claim could not be consolidated or joined with the claims of others.

The NLRB found that the employer violated the NLRA by barring employees from pursuing class action litigation or collective arbitration of work-related claims. It concluded that the arbitration provision prevented employees from taking any concerted legal action. The Board also concluded that the employer acted unlawfully by forbidding an employee from discussing a proposed compensation change with his coworkers and by firing him for discussing the proposed change and complaining to management about it. The Board filed an application for enforcement of its order.

Individual arbitration provision. An arbitration provision that prevents employees from taking any concerted legal action implicates two federal statutes: the FAA and the NLRA, the appeals court observed. While the FAA ensures that arbitration agreements are as enforceable as any other contract, it does not make arbitration agreements more enforceable than other contracts. On the other hand, Section 7 of the NLRA states, among other things, that employees have the right to engage in concerted activities . . . for mutual aid or protection. Thus, the appeals court had to determine whether the employer’s arbitration agreement was enforceable under these statutes.

While the question of whether federal law permits employers to require individual arbitration of employment-related claims is a question of first impression in the Sixth Circuit, at least four other circuits have considered the question. The Ninth Circuit in Morris v. Ernst & Young, LLP and the Seventh Circuit in Lewis v. Epic Systems Corp. held that arbitration provisions mandating individual arbitration of employment-related claims violate the NLRA and fall within the FAA’s savings clause. On the other hand, the Fifth Circuit in D.R. Horton, Inc v. NLRB, and Murphy Oil USA, Inc. v. NLRB, and the Eighth Circuit in Cellular Sales of Missouri v. NLRB and Owen v. Bristol Care, held that arbitration provisions mandating individual arbitration of employment-related claims do not violate the NLRA and are enforceable under the FAA.

The right question. Starting with the right question reveals that there is no need to ask whether the NLRA trumps the FAA, observed the Sixth Circuit. The two statutes do not conflict. Rather, the NLRA and FAA are compatible because the FAA’s savings clause addresses precisely this scenario. The NLRA prohibits the arbitration provision on grounds that would apply to any contractual provision, and thus triggers the FAA’s saving clause. Because of the FAA’s saving clause, the statutes work in harmony.

The core right that Section 7 protects is the right to engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection. Concerted activity includes “resort to administrative and judicial forums.” The NLRA prohibits mandatory arbitration provisions barring collective or class action suits because they interfere with employees’ right to engage in concerted activity, not because they mandate arbitration. These are grounds that would apply to any contract. According to the FAA’s saving clause, because any contract that attempts to undermine employees’ rights to engage in concerted activity is unenforceable, an arbitration provision that attempts to eliminate employees’ right to engage in concerted legal activity is unenforceable.

The Sixth Circuit concluded that the NLRA is unambiguous and that the statute itself makes clear that the right to concerted activity is a substantive right. Thus, the Sixth Circuit disagreed with the Fifth Circuit’s holding that employers may require employees to agree to a mandatory arbitration provision requiring individual arbitration of employment-related claims.

Partial dissent. Judge Sutton disagreed with that part of the decision that found the employer violated the NLRA by barring employees from pursuing class action litigation or collective arbitration of work-related claims. The dissent argued that in reaching this agreement, the employer and employee contracted to do just what the FAA allows: to use the streamlined efficiency, informality, and low costs of arbitration to resolve any disputes that might arise during the course of the employment relationship. He urged that the rule promulgated by the NLRB in D.R. Horton conflicted with the FAA and must yield.

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