Co-authored by Richard L. Alfred and Patrick J. Bannon

Employers that want to use traditional bilateral arbitration to resolve employment disputes won an important victory yesterday:  the Fifth Circuit overturned the National Labor Relations Board’s controversial D.R. Horton decision.  Nothing in federal labor law, the Fifth Circuit ruled, forbids employers and employees from agreeing to resolve disputes through individual rather than class or collective arbitration.

Yesterday’s ruling follows a string of pro-arbitration Supreme Court decisions, including Stolt-Nielsen, Concepcion and, this past June, American Express v. Italian Colors Restaurant.  Together with these cases, D.R. Horton further clears the way for employers to use individual arbitration to resolve wage and hour disputes under federal and state laws without subjecting themselves to Rule 23 class or Fair Labor Standards Act collective arbitration claims.

The D.R. Horton case arose from an overtime dispute between D.R. Horton and one of its former superintendents.  Like all D.R. Horton employees, the superintendent had agreed to arbitrate any disputes with the company on an individual basis only, without any class or collective arbitration.  Despite his agreement, the former superintendent notified the company that he intended to pursue arbitration on behalf of a nationwide class of similarly situated employees whom, he claimed, had been misclassified as exempt from overtime in violation of the FLSA.

D.R. Horton, of course, refused to participate in class or collective arbitration, citing the employee’s agreement.  In response, the former employee, filed a charge with the National Labor Relations Board, claiming that the agreement to forego class or collective arbitration violated his rights under the National Labor Relations Act.

Last year, the Board issued a surprising ruling in favor of the employee.  The Board explained that all employees — union and non-union, alike — have a federal right to join together to try to improve their working conditions, including a right to pursue litigation together on a class or collective basis.  Agreements requiring employees to resolve all disputes through individual arbitration only, the Board ruled, interfered with those employee rights.

All three of the federal circuit courts that had previously considered the Board’s D.R. Horton decision (the Second, Eighth and Ninth Circuits) found it unpersuasive.  Numerous lower courts have also rejected it.  But employees resisting individual arbitration continued to cite it in their efforts to arbitrate wage and hour claims on a class or collective basis.  Yesterday, the Fifth Circuit reversed the Board’s ruling and, in doing so, removed whatever shadow that ruling had cast over the enforceability of individual-only arbitration agreements.

The Board’s reasoning was flawed, the Fifth Circuit stated, because the Board paid insufficient attention to the Federal Arbitration Act.  In that statute, Congress provided that arbitration agreements must be enforced according to their terms, except in very limited circumstances.  Nothing in the text or the legislative history of the National Labor Relations Act, the appellate court ruled, warranted refusing to enforce as written an employer’s agreement with an employee to participate in arbitration only on an individual basis.

The Fifth Circuit relied on AT&T Mobility v. Concepcion, in which the Supreme Court explained the fundamental differences between individual and class arbitration and found the latter inconsistent with the FAA.  Accordingly, the Court of Appeals concluded, requiring an employer to allow class or collective arbitration would effectively deny the employer the benefits of arbitration — a result that would violate the FAA.

While the NLRB may not, as a matter of policy, choose to acquiesce in the Fifth Circuit’s opinion, yesterday’s decision is a compelling repudiation of the Board’s reading of the NLRA.  Unless the Fifth Circuit’s decision is overturned by the Supreme Court or an act of Congress (neither of which seems likely) employees are less likely to be successful in relying on federal labor law to resist enforcement of agreements to participate in individual arbitration.  Earlier this year, in American Express v. Italian Colors Restaurant, the Supreme Court held that agreements to participate in individual arbitration and forego class arbitration are enforceable even as to claims that are not economically feasible to pursue except on a class basis.  Thus, employees seeking to avoid enforcement of agreements limiting arbitration to individual claims have lost their two most widely used arguments.

While today’s decision is certainly a victory for employers, it includes one cautionary note.  The Fifth Circuit found that D.R. Horton’s arbitration agreement was not clear enough that employees retained the right to file unfair labor practice charges with the Board.  The court allowed to stand the portion of the Board’s decision requiring D.R. Horton to clarify its agreement on that point.  This portion of the decision warrants further study, especially for employers with operations within the Fifth Circuit’s jurisdiction.  This and related aspects of the Fifth Circuit’s decision are discussed in further detail in Seyfarth Shaw’s Management Alert, “Fifth Circuit Sets Aside NLRB Rule Prohibiting Class Action Waivers (12/03/13) at