California Court Rejects the NLRB Ruling on Class-Action Arbitration Waivers

Earlier this year, the National Labor Relations Board (NLRB) held in D.R. Horton that a class action waiver that required, as a condition of employment , the employee to waive his rights to class-action litigation while simultaneously waiving his rights to class-action arbitration was illegal under the National Labor Relations Act (NLRA).  The NLRB opined that such agreements violate Section 7 of the NLRA by restricting the employee’s right to engage in concerted activity for the improvement of working conditions or increased wages.

The controversy surrounding this case stems from the fact that while the Supreme Court has ruled on the legality of such waivers in consumer agreements, it has not addressed class-action waivers relative to an employment case.   The Supreme Court most recently addressed the issue of class-action arbitration agreements in AT&T Mobility LLC v. Concepcion in which it held that merchants could require consumers to waive their rights to class-action litigation and require arbitration on an individual basis.   The NLRB ruled that AT&T was not applicable to the D.R. Horton dispute since requiring an employee to enter into such an agreement would curtail concerted activity which is an unfair labor practice under the NLRA.  The NLRB reasoned that the right to engage in concerted activity as provided by the NLRA trumped the enforcement of arbitration agreements according to their terms as provided in the Federal Arbitration Act (FAA).

While the NLRB may have won the battle, it did not necessarily win the war as state and district courts can reject the D.R. Horton decision. That is exactly what happened earlier this month in Iskanian v. CLS Transportation Los Angeles, LLC., in which a California Appellate Court refused to give credence to the D.R. Horton decision and held that an employment agreement which contained class-action waivers and compelled individual arbitration was enforceable.

The employee, Iskanian, sued CLS under the California Labor Code Private Attorneys General Act (PAGA) for its failure to pay overtime and provide rest and meal breaks.  CLS moved to compel arbitration based on an agreement Iskanian signed when originally hired that stated that “any and all claims” arising out of employment would be subject to binding arbitration and required all parties to waive their right to bring class-action claims.   The trial court granted CLS’ motion and Iskanian appealed. While the appeal was pending, the California Supreme Court decided Gentry v. Superior Court in which it held that class action arbitration waivers in employment agreements are unenforceable if the plaintiff’s statutory rights were precluded by the presence of four specific factors.  Shortly after the California Supreme Court issued the Gentry decision the U.S. Supreme Court issued its decision in AT&T v. Concepcion stating that the FAA preempts state laws relative to arbitration.   This called into question whether Gentry or AT&T controlled relative to class-action employment waivers.

The Iskanian Court held that AT&T, not Gentry, is the governing law relative to class-action arbitration agreements.  The Court expressly rejected the NLRB’s decision in D.R. Horton stating that the AT&T decision did not differentiate between employment or consumer arbitration agreements, and AT&T is just as applicable to employment agreements as it is to consumer agreements.    The Court noted that the NLRB overstepped its bounds with its interpretation of the FAA, stating, “As the FAA is not a statute the NLRB is charged with interpreting, we are under no obligation to defer to the NLRB’s analysis.”   According to the Iskanian Court, a “congressional command” does not exist within the NLRA which would prohibit the enforcement of an arbitration agreement according to its terms.  Absent such a command, the NLRA does not trump the FAA.  (See AT&T Mobility LLC v. Concepcion 131 S. Ct. 1740, 1744 (U.S. 2011); Compucredit v. Greenwood, 132 S. Ct. 665 (U.S. 2012)).

It is very likely that this case will be appealed to the California Supreme Court as there is a split on the application of AT&T among California Appellate Courts. See, e.g., Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2d Dist. 2011) (holding PAGA waivers are unenforceable); Reyes v. Macy’s, Inc., 202 Cal. App. 4th 1119 (1st Dist. 2011) (holding employers cannot compel individual arbitration of PAGA claims). For now, California employers in the second district enjoy the benefit of federal and state precedent upholding the enforceability of employment agreements requiring a waiver of class-action arbitration.  So long as the arbitration agreement is not unconscionable, employers have assurance that their agreements will be enforced.  This case also provides employers in other judicial districts within California with solid arguments in defense of the arbitration agreement.  The Iskanian decision further affirms the judiciary’s preference of enforcing arbitration agreements in accordance with their terms.