In a decision that creates a split with the 5th Circuit Court of Appeals, the 7th Circuit on May 26, 2016 adopted the National Labor Relations Board’s D.R. Horton rationale and held that a condition of employment requiring employees to waive the right to bring class or collective actions either in arbitration or in judicial forums runs afoul of Section 7 of the National Labor Relations Act, and is unenforceable as illegal.  Lewis v. Epic Systems Corporation, No.15-2997 (7th Cir. 2016).

As we have earlier noted, in D.R. Horton, 357 NLRB No. 184, the Board held that a clause in an  agreement waiving class or collective proceedings against the employer in either arbitration or a judicial forum violated an employee’s rights under Section 7 of the NLRA to engage in protected concerted activities.  On appeal, the Fifth Circuit overruled the Board, reasoning that the right to proceed collectively was not a substantive right and could be waived.  The Fifth Circuit also held that the Board’s rationale was in conflict with the Federal Arbitration Act which favors the enforcement of arbitration agreements. D.R. Horton v. NLRB, 737 F.3d at 357.

In the Lewis case, employees were required to sign, as a condition of continued employment, an agreement which provided that any wage and hour claim against the employer must be brought as an individual arbitration, and that the employee “…waived the right to participate in…any class, collective or representative proceeding.”  The employee later sued the employer in federal court, claiming that he was not properly compensated for overtime work under the Fair Labor Standards Act and Wisconsin state law.  The employer moved to dismiss the complaint and compel arbitration under the agreement.  The lower court agreed with the employee that the agreement was unenforceable since it interfered with the employee’s exercise of Section 7 rights, and the employer appealed.

In affirming the lower court, the 7th Circuit first decided that the ability to pursue class, collective or representative legal remedies was a concerted activity protected by Section 7.  It further found that an employer’s insistence that an employee waive this right violated the Act, and was unenforceable.

The 7th Circuit disagreed with the 5th Circuit’s holding that the right to proceed collectively in either litigation or arbitration was a procedural right that could be waived.  Rather, the 7th Circuit held that the right to proceed collectively constituted a substantive right guaranteed by Section 7, and that an employee could not be forced to waive that right as a condition of employment.

The Court also rejected the 5th Circuit’s decision giving precedence to the Federal Arbitration Act over rights protected by the NLRA.  Although it agreed with the 5th Circuit that the FAA favors the enforcement of arbitration agreements, the Court noted that the FAA provides that arbitration agreements can be rendered unenforceable “…upon such grounds as exist in law or equity for the revocation of any contract.”  The Court reasoned that since the agreement at issue was unlawful under Section 7 of the NLRA, it met the FAA’s criteria for non-enforcement.

It is unknown at this time if this decision will be appealed, but given the split between the 7th and 5th Circuits, it is likely that the Supreme Court will be called upon to resolve the matter at some point.