7th Circuit surprises by siding with NLRB on arbitration agreements

It’s been two and a half years since the 5th Circuit, in D.R. Horton, rebuked the NLRB’s prohibition on mandatory arbitration clauses. Since, however, the NLRB has been undeterred, finding, in case after case, that employers’ mandatory arbitration agreements (with and without class-action waivers) violate employees’ rights to engage in protected concerted activity under section 7 of the National Labor Relations Act.

Thus, when I heard that the traditionally business friendly 7th Circuit would be taking up the same issue, I figured the NLRB would go 0 – 2 in the federal courts of appeals on this issue. Boy was my prognostication radar off.

In Lewis v. Epic Systems, the 7th Circuit considered a mandatory arbitration agreement [pdf], which:

1. Mandated that wage-and-hour claims could be brought only through individual arbitration and that the employees waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.” 
2. Included a clause stating that if the “Waiver of Class and Collective Claims” was unenforceable, “any claim brought on a class, collective, or representative action basis must be filed in a court of competent jurisdiction.” 
3. “Deemed [employees] to have accepted this Agreement” if they “continue[d] to work at Epic,” with no option to decline if they wanted to keep their jobs.

When one employee believed Epic had misclassified him as exempt and unlawfully denied him overtime pay, he sued in federal court, challenging the legality of the arbitration agreement under section 7 of the NLRA. To my surprise, the 7th Circuit agreed with him:

The question thus becomes whether Epic’s arbitration provision impinges on “Section 7 rights.” The answer is yes. …

Insofar as the second aspect of its provision is concerned, Epic’s clause runs straight into the teeth of Section 7. The provision prohibits any collective, representative, or class legal proceeding. Section 7 provides that “[e]mployees shall have the right to … engage in … concerted activities for the purpose of collective bargaining or other mutual aid or protection.” A collective, representative, or class legal proceeding is just such a “concerted activit[y].” Under Section 8, any employer action that “interfere[s] with, restrain[s], or coerce[s] employees in the exercise of the rights guaranteed in [Section 7]” constitutes an “unfair labor practice.” Contracts that stipulate away employees’ Section 7 rights or otherwise require actions unlawful under the NRLA are unenforceable.

Because Lewis directly opposes D.R. Horton, we now have a clear split between the 7th and 5th Circuit, which only the Supreme Court can resolve.

So, what is an employer to do?

If you operate in the 7th or 5th Circuits, the answers is easy—follow the precedent of your controlling appellate court. Otherwise (like Ohio businesses, for example), you have a decision to make. How aggressive do you want to be with arbitration agreements and class-action waivers? The conservative approach is to forego these agreements until SCOTUS can weigh in, or until a more employer-friendly NLRB is in place. The more aggressive approach is to stand by your agreements, knowing that if challenged, the NLRB and some courts will side with your employees and find the agreement unlawful.

What is certain is that this issue is a mess, and will continue to be for the foreseeable future.