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Split Circuit Court Decisions Create Uncertainty on Class Action Waivers and likely Supreme Court Review

Last week the 7th Circuit U.S. Circuit Court of Appeals, in Lewis v. Epic-Systems Corp., held that a company’s arbitration agreement, which prohibits employees from participating in “any class, collective or representative proceeding,” violated an employees’ right to engage in concerted activity under the National Labor Relations Act (NLRA). The ruling creates a circuit split on the enforceability of class action waivers because the 2nd, 5th, and 8th Circuits each have held that class action waivers do not violate an employee’s rights under the NLRA. Because of this circuit split, it is likely that the Supreme Court will visit this issue in the near future.

Background on Enforceability of Class Action Waivers

In recent years, federal courts have largely upheld arbitration pacts with class or collective action waiver language that provides that not only must an employee bring his or her claim exclusively in arbitration, but also that he or she must do so on an individual, and not on a class-wide basis. Specifically, in AT&T Mobility v. Concepcion (2011), the Supreme Court ordered the enforcement of arbitration agreements in a dispute involving an arbitration provision in cellphone contracts. In the process, Concepcion generally held that the Federal Arbitration Act (FAA) preempts state bans on class action arbitration waivers. The case however, did not directly address the viability of class action waivers in the employment context.

Shortly thereafter, in January 2012, the National Labor Relations Board (NLRB) ruled that an employer could not force its employees to sign arbitration agreements with class waiver provisions because such agreements were unlawful under the NLRA. See D.R. Horton, Inc., 357 NLRB 184 (2012). On appeal, the 5th Circuit rejected the NLRB’s holding that class waivers in mandatory arbitration agreements are unlawful, joining the 2nd and 8th Circuits, which had issued similar rejections.

Seventh Circuit Opinion

In Lewis v. Epic-Systems Corp., the plaintiff had entered into an arbitration agreement with his employer in which he had waived his “right to participate in or receive money or any other relief from any class, collective, or representative proceeding.” Lewis later filed a suit in federal court on behalf of himself and other employees alleging that the company had violated the Fair Labor Standards Act (FLSA) by misclassifying the employees and depriving them of overtime.

The employer moved to dismiss plaintiff’s claims and compel arbitration on an individual claim basis. The plaintiff argued that the agreement’s class and collective action waiver was unenforceable because it interfered with his right to engage in concerted activity under Section 7 of the NLRA. The district court agreed with plaintiff and denied employer’s motion to dismiss, relying primarily on a prior decision the district court had issued adhering to the D.R. Horton’s decision. The district court believed the 5th Circuit’s majority opinion “never persuasively rebutted the board’s conclusion that a collective litigation waiver violates the NLRA and never explained why, if there is tension between the NLRA and the FAA, it is the FAA that should trump the NLRA, rather than the reverse.” The employer subsequently appealed the district court’s decision to the 7th Circuit.

In its analysis, the 7th Circuit adopted the NLRB’s reasoning (as stated in D.R. Horton) that engaging in class, collective or representative proceedings is “concerted activity” and a protected right under Section 7 of the NLRA. Therefore, the court concluded, it would be an unfair labor practice under Section 8 of the NLRA for an employer “to interfere with, restrain, or coerce employees in the exercise” of this right.

Surprisingly, the 7th Circuit rejected the argument that the arbitration agreement must be enforced under the FAA—an argument adopted by all the other circuits that have ruled on this matter. In its ruling, the court focused on the FAA’s savings clause, which provides that arbitration agreements are enforceable except if the agreements themselves are unlawful. Thus, the court found that Epic’s arbitration agreement is illegal under the NLRA, and because an illegal agreement is not enforceable under the FAA’s savings clause, there is no conflict between the FAA and the NLRA.

General Takeaways for Employers

The Lewis decision leaves employers with several takeaways: First, employer need to know that class and collective action waivers will not be enforced in federal courts sitting in Illinois, Indiana and Wisconsin, which are the states within the Seventh Circuit’s jurisdiction.

Second, these same agreements will likely continue to be enforced in federal courts sitting in the circuits that have rejected the NLRB’s reasoning in D.R. Horton (for now, 2nd, 5th, and 8th Circuits).

Third, this circuit split will likely involve the input of the Supreme Court in the future but perhaps not between the Presidential election, and the appointment of a ninth Justice, given the desire to avoid a 4-4 split. If the case is brought before the Supreme Court before a new Justice is confirmed by the Senate, and the Supreme Court decision is split 4-4, each of the Circuit’s decisions will remain in effect.

The NLRB Rules That Chipotle’s Handbook Policies Violated the NLRA

As we have previously covered here, here and here, the NLRB has opined that various common handbook provisions are unlawful under the NLRA because they may have the effect of inhibiting employees from engaging in protected activities, such as discussing wages, criticizing management, publicly communicating about working conditions and discussing unionization.

Last week, an NLRB judge provided further guidance in this area in ruling in Chipotle Services LLC and Pennsylvania Worker’s Organizing Committee (Nos. 04-CA-1437314; 04-CA-149551) that Chipotle violated the NLRA by maintaining unlawful policies, improperly forcing an employee to delete social media posts critical of Chipotle, and terminating the employee for his attempts to have his co-workers sign a petition protesting Chipotle’s alleged denial of work breaks.

The last part of the ruling was not entirely surprising – the facts strongly indicated that Chipotle terminated the employee because of, and shortly after, his attempts to have his co-workers sign the petition. However, in finding unlawful various Chipotle policies related to confidentiality, social media, solicitation, ethical communications, and political activities, the decision highlights the difficulties employers face in crafting policies that balance the competing interests of an employee’s right to engage in concerted activity and, among other interests, an employer’s need to protect its confidential information and brand. Some of the policies which the NLRB held were unlawful included:

• A social media policy that prohibited “false” and “misleading” social media posts, on the basis that “an employer may not prohibit employee postings that are merely false or misleading . . . it must be shown that the employee had a malicious motive,” as well as the provision of the policy prohibiting the disclosure of “confidential” information, where the term “confidential” was vague and undefined;
• A policy prohibiting “improper use” of Chipotle’s name or trademarks, on the basis that “employees would reasonably interpret any non-work-related use of [Chipotle’s] name to be improper”;
• An “ethical communication” policy that “prohibit[ed] exaggeration, guesswork and derogatory characterizations of people and their motives,” on the basis that it could be read to prohibit criticism of managerial decisions.

The decision reiterates the NLRB’s previous guidance that broad or vague rules relating to (or not carefully defining) concepts such as “civility,” “respect,” “disparagement” and “confidential information” will be found unlawful because some employees may read them to prohibit protected activity, even where (as here) the policies also contain a disclaimer that they do “not restrict any activity that is protected or restricted the NLRA . . .”

Finally, it should be noted that the policies at issue in the case were, in fact, outdated versions, with Chipotle having replaced them with new versions at the time of the events at issue. The judge found this fact irrelevant, as the Chipotle supervisors (for reasons unclear) relied upon the prior versions of the policies in counseling the employee and ultimately terminating him. Employers, therefore, should take care to properly distribute new policies to staff and counsel them on their application, lest they lose the benefits of any remedial policy updates.

Beware of the Literal and Hypothetical When Considering Work Rules

National Labor Relations Board activity in the area of work rules, among other areas, has become the new normal. Employers have come to expect that the Board will find a work rule unlawful if the rule, taken literally, could hypothetically interfere with an employee’s right to engaged in “concerted activities” – legal speak for two or more employees raising issues about the terms or conditions of their employment. Now, the Board is also finding success on appeal.

Most recently, the District of Columbia Court of Appeals decided Hyundai America Shipping Agency, Inc. v. NLRB, a case in which Hyundai appealed the Board’s finding that certain work rules in its handbook violated the National Labor Relations Act because they had a tendency to interfere with its employees’ right to engaged in concerted activities. Those work rules included: (1) a prohibition on employees discussing matters under investigation by the company, (2) a limit on the disclosure of information from Hyundai’s electronic communication and information systems, (3) a prohibition on performing non-work activities during “working hours,” and (4) a provision urging employees to make complaints to their immediate supervisor or human resources employees rather than to fellow employees. The Court affirmed the Board’s decision as to the first three rules, holding that:

• A rule prohibiting, as a blanket matter, the discussion of matters under investigation is problematic because it limits an employee’s right to discuss his or her own employment;

• A rule prohibiting the disclosure of information on the employer’s electronic systems except to authorized persons is problematic because it could prevent an employee from sharing non-confidential information, including information about the terms or conditions of his or her employment; and

• A rule prohibiting an employee from performing non-company work during “working hours” is unlawful because the term working hours – unlike “working time” – could be read to prohibit employees from communicating during breaks.

Interestingly, the Court reversed the Board as to the fourth rule, finding that a rule “urging” employees with a complaint to speak with supervisors or HR rather than co-workers is permissible because it merely urges employees to so act, rather than acting as a prohibition.

So what does this mean for employers? First, the Board’s assault on employer work rules will continue, given that this is an area of frequent disconnect between the Board’s interpretation of the law and common employer practice. Second, employers need to read their rules literally and consider hypothetical scenarios, even when the rule is proper and sensible in 95 percent or more of such scenarios.

For example, an employer can limit employee communications during an investigation, but not all such discussions on a per se basis. The employer should evaluate the issue on a case-by-case basis and consider whether it has a legitimate business justification requiring confidentiality (such as when there is a basis to believe that a disclosure will put evidence at risk or otherwise compromise the investigation). Likewise, an employer may very well expect (legitimately) that its employees will not disclose internal company information, but the rule memorializing that expectation should be limited to confidential information and exclude information about one’s own terms and conditions of employment, so as not to chill the activities of employees who want to talk about their own employment terms. Lastly, it makes all the sense in the world for employers to expect that their employees will perform only work activities while working. But the proper terminology should be used to ensure that employees are not restricted during breaks.

It is noteworthy that, in finding the rule about disclosing information on the employer’s electronic systems improper, the Hyundai Court acknowledged that a “reasonable reader” might understand the rule to be limited to confidential information, which would make it permissible. Unfortunately, “reasonableness” is not the standard; what is possible is. Accordingly, employers would be wise to review their rules carefully and literally to make sure that they are using the most precise language possible to describe the prohibited conduct and that the prohibitions cannot be interpreted – even in a strained way – to limit protected conduct.

Obama Board Reaffirms Successor’s Right to Set Initial Terms of Employment when Taking Over Unionized Operation

Last week, the National Labor Relations Board issued a refreshingly employer-friendly decision which allowed a successor company to implement new pay terms without having to first bargain with the labor union. In Paragon Systems, Inc., 362 NLRB No. 182 (2015), a divided three-member Board panel held that the new guard service, Paragon Systems, Inc. (Paragon), had given sufficient notice to employees of a change in pay and therefore could assert its right to unilaterally set the initial terms and conditions of employment when it assumed a federal contract from the predecessor employer, MVM, whose work force was represented by The Federal Contract Guards of America International Union.

A Successor Can Make Unilateral Changes

In 2011, the Board reinstated the “successor bar” doctrine, where a union is presumed to retain its majority status when the employees it represents are hired to work for a successor employer. UGL UNICCO Service Co., 357 NLRB 76 (2011). This decision overturned MV Transportation, 337 NLRB 770 (2002) in which the Bush Board had refused to impose a successor bar in favor of the employees’ right to free choice of a union representative.

Paragon was deemed a successor because the majority of its work force was made up of former MVM guards. Paragon conceded that it was a successor and in fact, agreed to recognize and bargain with the union. However, without first consulting with the union, Paragon implemented employee pay terms that were different from what its predecessor had in place. Specifically, Paragon reduced the amount of paid “guard mount” time – time spent getting and returning weapons and ammunition – from 30 minutes to 10 minutes per day and discontinued paying for “guard mount” time on weekends.

The union filed an unfair labor practice charge against Paragon which was dismissed by the Administrative Law Judge.

On appeal, the union and the NLRB’s general counsel argued that Paragon as a successor violated Section 8(a)(5) and (1) when it unilaterally made changes to the pay terms. In analyzing the case, the Board stated that “a ‘successor’ employer under NLRB v. Burns International Security Services, 406 U.S. 272 (1972), and Fall River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27 (1987), is free to set initial employment terms without first bargaining with an incumbent union, unless ‘it is perfectly clear that the new employer plans to retain all of the employees in the unit,’ in which case ‘it will be appropriate to have him initially consult with the employees’ bargaining representative before he fixes terms.’” Paragon Systems, Inc., 362 NLRB. No. 182, slip op. at p. 2 (quoting Burns at 294-295). The Board went on to state that “[o]nce a Burns successor has set initial terms and conditions of employment, however, a bargaining obligation attaches with respect to any subsequent changes to terms and conditions of employment.” Id. In other words, once the successor has established the initial terms, it cannot make any unilateral changes to employment terms without first bargaining with the union.

The Board held that it was undisputed that Paragon was a Burns successor and had properly implemented the initial terms and conditions of employment when it started operations. Accordingly, the Board held that Paragon did not violate the Act when it made unilateral changes to the pay terms that had been in place under the prior employer’s agreement.

Effective Notice to Employees Is Critical

The key issue in this decision was not whether the successor had the right to implement its initial terms and conditions upon becoming the new employer, but the sufficiency of the notice given to employees regarding the change in pay terms. The majority found that Paragon provided adequate notice to employees that there may be a change in such terms. Specifically, prior to taking over the contract, Paragon announced that it had the right to establish compensation, benefits and working conditions; its job applications specifically advised applicants that employees would have to conform to all Paragon policies and reiterated Paragon’s right to set compensation, benefits and other terms and conditions of employment; and Paragon specifically informed applicants that shift schedules would be set in accordance with the operational needs of the contract being serviced by Paragon.

Taken together, these statements were found by the Board to have made clear to employees that Paragon was not adopting MVM’s practice regarding paid guard mount time. Additionally, the implementation of these pay changes occurred on the first day that Paragon assumed operations. The Board majority concluded that the change in pay was within Paragon’s right to set initial terms and conditions of employment.

The sole dissenting Board member argued not that the successor was prohibited from setting the initial terms and conditions of employment, but that the implementation of this change was unlawful because Paragon had not provided specific notice of the specific change. The dissent noted that none of Paragon’s prior statements and communications to employees specifically addressed paid guard mount time.

Moreover, noted the dissent, even if Paragon’s general statements regarding its right to establish compensation, benefits and other working conditions were broad enough to cover the guard mount pay, the fact that Paragon provided detailed information in the contingent offer letter regarding many of the changes in wages and benefits, but was silent regarding guard mount time, reasonably conveyed to employees that no change would be made to such pay.

Practical Takeaways

This decision is good news for potential buyers of businesses, and other employers who are deemed to be successor employers of unionized operations having union contracts, because it reaffirms a successor’s right to make unilateral changes to the initial terms and conditions of employment upon commencement of operations (so long it is not “perfectly clear” that the successor intends to follow the existing agreement – a doctrine beyond the scope of this alert, as the “perfectly clear” doctrine is anything but perfectly clear).

In order to make such changes lawfully, however, the successor must make certain to provide adequate notice about the changes to employees. Notice will be deemed adequate if the successor communicates that it has the right to establish wages, benefits, and working conditions and provides enough general detail about the terms that may be subject to change. A cautious employer should be as specific as it can be when setting initial terms and conditions.

What Are Your Company’s Wage & Hour Risks?

Wage & Hour class actions are being filed at a pace that dwarfs almost all other types of litigation. With a myriad of federal and state laws and regulation, employers not only need to take steps to minimize the risk of a suit, but also must be prepared to defend themselves. Launch the brief video below to hear how Labor and Employment Group partners Cheryl Orr and Stephanie Gournis are helping employers involved in employment class actions, as well as helping companies to minimize the risk of litigation.

No More No-Gossip Policies?

A National Labor Relations Board (NLRB) administrative law judge ruled recently that the “no-gossip” policy of Laurus Technical Institute, a for-profit technical school located in Georgia, broke federal law because it was overly broad, ambiguous and restricted employees from discussing or complaining about any terms and/or conditions of employment, even though nothing in Laurus’s policy directly addressed discussions about wages, hours or other employment terms and conditions.

Kate Gold, partner in the Los Angeles office, recently told Human Resource Executive Online during an interview on the topic of the Laurus decision and no-gossip policies for employers, “Though the NLRB has been focused on other policies that could violate an employee’s right to engage in protected concerted activity — such as social media or confidentiality policies — no-gossip policies can be especially problematic.”

Kate went on to say “I would not include it among the top 10 or even the top 20 essential policies an employer should include in a handbook or policy manual, such as an at-will, anti-harassment or reasonable accommodation policy. However, given the type of concern raised by a no-gossip policy, there could be other employer policies that are problematic for the same reasons. The issue raised by an overbroad no-gossip policy is whether it constitutes an unlawful restriction on an employee’s right to engage in protected concerted activity under Section 7 of the National Labor Relations Act.”

For the full text of the article click here.