United States: NLRB Offers New Guidance On Mandatory Arbitration Agreements Following Last Year's Epic Decision

The National Labor Relations Board (the Board) issued a 3–1 decision in Cordúa Restaurants, Inc., 368 NLRB No. 43 (2019), on Wednesday that provides significant new guidance regarding the intersection of arbitration agreements and the National Labor Relations Act (NLRA). The Board's decision expressly authorizes employers to implement arbitration agreements that include collective waivers in direct response to employees filing a Fair Labor Standards Act (FLSA) collective action. Further, the Board held that warning employees that they will be discharged if they do not accept such an agreement — even with FLSA litigation pending — does not constitute a violation of the NLRA.

In January 2015, seven employees filed an FLSA collective action against Cordúa Restaurants, Inc., a Houston-based restaurant group, in the United States District Court for the Southern District of Texas. Subsequently, 13 additional employees opted into the lawsuit. In response to the lawsuit, Cordúa implemented a revised mandatory arbitration agreement that was to be executed by all employees. The new agreement expressly required employees to waive FLSA collective rights and arbitrate FLSA claims on an individual basis. Though Cordúa had previously required employees to execute an arbitration agreement that waived class action rights, the new agreement marked the first time that employees were asked to waive collective rights. When the new agreement was presented to employees, managers informed employees that they would not be scheduled for any additional shifts unless and until they executed the new arbitration agreement. The charging parties asserted that both implementing the arbitration agreement because of the litigation and threatening to constructively terminate those who refused to sign the agreement constituted violations of the NLRA.

The Board rejected both of those contentions. First, the Board held that the Supreme Court's authorization of class and collective waivers in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), permitted an employer to implement such an agreement in response to FLSA litigation. Even though the Board assumed that employees were engaging in protected activity when opting into a collective action, the Board clarified that opting in is solely a procedural step. Therefore, an arbitration agreement preventing employees from opting into a collective action does not prohibit an employee from exercising their section 7 rights because they still have other options for exercising their rights outside of a collective action. Specifically, the Board found that the Supreme Court's conclusion that collective litigation on a group basis does not fall within the protections of section 7 of the NLRA means that limiting the right to pursue such litigation could not trigger NLRA coverage merely because a lawsuit had been filed by other employees.

Second, the Board found that warning employees that failure to execute the new arbitration agreement would result in no further work did not constitute unlawful coercion to dissuade protected group activity. The Board stated that such warnings "amount[] to an explanation of the lawful consequences of failing to sign the agreement and an expression of the view that it would be preferable not to be removed from the schedule" because "Epic Systems permits an employer to condition employment on employees entering into an arbitration agreement that contains a class- or collective-action waiver . . . ."

The Board's decision offers a new strategy for limiting the reach of collective FLSA claims even after such actions have been filed. At the same time, it raises several challenging issues for employers facing collective FLSA claims. In particular, employers may be able to stem the tide of opt-ins by quickly implementing new arbitration agreements after litigation arises. However, doing so could encourage early employee participation in collective litigation by incentivizing employees to join before executing a new arbitration agreement or by drawing attention to pending litigation before court-sanctioned notice is issued. Further, employers could, in some circumstances, create FLSA retaliation claim exposure if employees are punished for refusing to execute a new arbitration agreement and ultimately opt into a collection action or if employees are terminated before they can opt in but after they express interest in participating — issues beyond the Board's jurisdiction. Additionally, the Board's finding that the employer's "explanation of the lawful consequences" was lawful should not be read too broadly, as it may prove fact-dependent in future proceedings. As always, state law considerations also need to be evaluated, especially in employee-friendly states like California, where employers who wish to implement mandatory arbitration agreements with class action waivers when litigation is pending must follow specific requirements.

Employers confronted with collective FLSA claims should, before implementing reactive arbitration agreements, coordinate closely with their FLSA litigation counsel and employment and labor counsel to evaluate the competing risks of such a strategy.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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