December 22, 2024

N.L.R.B. Backs Workers on Joint Arbitration Cases

In a decision that will no doubt anger many companies, the labor board concluded that a federal law protecting workers’ right to engage in concerted action trumps any arbitration agreement that bars them from bringing group claims. The ruling applies to nonmanagement private sector workers, union and nonunion, from low-wage restaurant workers to well-paid employees on Wall Street.

The ruling examined an agreement used by a nationwide homebuilding company, D. R. Horton, in which workers were required to waive their right to sue in court and instead bring all claims to an arbitrator on an individual basis. The agreement prohibited the arbitrator from consolidating claims, allowing a class or collective action or awarding relief to a group or class of employees.

The labor board ordered Horton to rescind the agreement or change it to make clear to employees that they were not waiving their right to pursue collective action.

“This is a big deal,” said Professor Alex Colvin, an expert on mandatory arbitration agreements who teaches at the Cornell School of Industrial and Labor Relations. “Mandatory arbitration agreements are so widespread, and this would suggest that many of them violate labor law by barring class actions. I also think the business community will be up in arms because you have federal labor law being applied in a nonunion setting.”

Mr. Colvin said more than 25 percent of nonunion workers had signed an agreement as a condition of employment in which they promised to take any employment dispute to arbitration, rather than to a judicial forum.

In amicus briefs, the Labor Department and the Equal Employment Opportunity Commission supported the workers’ position.

But the United States Chamber of Commerce and other business groups argued in opposing briefs that the labor board should defer to a Supreme Court decision issued last April involving consumers who had sued ATT Mobility for fraud. In that case, the high court ruled 5-4 along ideological lines that businesses could use standard-form contracts to forbid consumers from banding together in a single arbitration.

The Supreme Court found that the Federal Arbitration Act, which favors arbitrations, trumped a California Supreme Court decision that held that mandatory agreements that waived class actions were unconscionable.

The labor board distinguished its case by saying that the Federal Arbitration Act did not trump the National Labor Relations Act, the landmark 1935 law that gave workers a federally protected right to unionize and engage in concerted action.

“The board has long held, with uniform judicial approval, that the N.L.R.A. protects employees’ ability to join together to pursue workplace grievances, including through litigation,” the ruling said.

Justin M. Swartz, a New York lawyer who represents plaintiffs in employment cases, said, “The board’s decision recognizes the reality that employees, whether on Wall Street or Main Street, can’t enforce their rights one at a time. They need to be able to pool resources.”

But Marshall B. Babson, a former labor board member who helped write the amicus brief filed by the chamber, said the board was using an overly broad reading of concerted activity. “The National Labor Relations Act was not intended to be a ‘super class action statute’ that protects and preserves the right to proceed as a class in all circumstances without regard to the usual considerations by the court,” he said.

The ruling was completed on Tuesday and signed by two Democratic members, before one of those Democrats, Craig Becker, stepped down that day as his recess appointment expired. The board’s Republican member, Brian Hayes, recused himself in the case, without giving a reason. Board officials said the decision was legitimate because the board had a three-person quorum at the time the ruling was signed.

On Wednesday, President Obama defied Republicans in Congress and made three recess appointments to the labor board to prevent it from becoming paralyzed. When Mr. Becker stepped down on Tuesday, the board shrank to two members, including its chairman, Mark G. Pearce. Under a Supreme Court ruling, the board, which has five seats, cannot issue any decisions unless it has at least three members.

The Horton case was brought by Michael Cuda, a superintendent at the company, who asserted that Horton had misclassified a group of employees as superintendents to deprive them of protections, like overtime pay, under the Fair Labor Standards Act. The company said Mr. Cuda’s employment agreement prohibited group claims.

In the decision released Friday, the board noted that it was not banning agreements that required employees to use arbitration to settle disputes, but that such agreements must offer some way for employees to make class and collective claims, either in arbitration or in court.

The decision is likely to be appealed to a federal court of appeals.

Business groups that filed amicus briefs in the case repeatedly cited the ATT decision by the Supreme Court as preventing the type of ruling made by the labor board. In that case, a California couple had objected to a $30 charge for what was said to be a free cellphone. They had signed a “take it or leave it” standard contract from ATT Mobility that required them to resolve disputes through arbitration and prohibited them from joining with others to seek class-action treatment, whether in arbitration or in traditional litigation in court.

Susanne Craig contributed reporting.

This article has been revised to reflect the following correction:

Correction: January 6, 2012

An earlier version of this article misstated the last name of a Cornell University professor. He is Alex Colvin, not Corvin.

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DealBook: The Fallacy Behind Tax Holidays

In a letter to President Obama, Tom Donohue, president of the U.S. Chamber of Commerce, said tax breaks would create new jobs. The president spoke to Mr. Donohue's organization in February.Charles Dharapak/Associated PressIn a letter to President Obama, Tom Donohue, president of the U.S. Chamber of Commerce, said tax breaks would create new jobs. The president spoke to Mr. Donohue’s organization in February.

As President Obama confronts the nation’s dismal unemployment problem — stubbornly stuck at 9.1 percent with, shockingly, zero net jobs created in August — Wall Street and corporate America are working behind the scenes in Washington to push for a series of temporary tax breaks, which they insist will help create jobs.

Of course, businesses want an overhaul of the corporate tax code that would reduce rates for the long term. But for now they are seeking a series of tax holidays, including a payroll tax break for employers, not just employees, and a tax break to let companies repatriate about $1 trillion that is sitting overseas. In turn, they say, they will spend it on new recruits, perhaps as many as 2.9 million of them, according to a letter the United States Chamber of Commerce sent to the president on Monday.

Consider it a form of horse trading — tax cuts for jobs. There is only one small problem with this strategy: temporary tax cuts rarely result in new jobs and always result in less tax revenue.

“Tax policy is not a great lever for adjusting short-term growth,” explained Howard Gleckman, a resident fellow at the Tax Policy Center , who has reviewed dozens of studies on the subject. Most temporary tax holidays “reward people for what they are going to do anyway,” he said, adding that “the bang for the buck is very low — you’re subsidizing companies that were already going to hire.”

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A seminal study by John H. Bishop and Mark Montgomery that looked at the Targeted Jobs Tax Credit bill from 1977, which was aimed at temporarily giving employers an incentive to hire disadvantaged workers, showed that “at least 70 percent of the tax credits were claimed for hiring workers who would have been hired even in the absence of the tax credit.” Companies claimed more than $4.5 billion in credits as a result.

That is not to suggest that tax policy cannot help with long-term growth — virtually every academic study says it absolutely can — but that tax policy is a lousy way to stimulate the economy on a temporary basis.

Let’s be honest, even if it is an uncomfortable truth: The jobs crisis is not really a function of tax policy; it is a function of economics. Right now, there is too little demand for products.

R. David McLean, a visiting assistant professor of finance at the MIT Sloan School of Management, published a new study last week that showed companies were sitting on trillion-dollar piles of cash, not because they are hoarders or greedy, but because they are worried about the economy and that their businesses might not be as strong as they hope in the future.

Mr. McLean said the volatility of cash flow had gone up over the last 30 years. For every dollar that companies have raised in recent years by issuing new shares, they have saved 60 cents, he said. “My study suggests that firms are saving more of their share issuance proceeds as cash because they have greater needs for precautionary cash savings than before,” he added.

To Mr. McLean, the lesson is that public policy toward business must be about creating as much certainty on regulations as possible, given that economic cycles will most likely create their own uncertainty. “If they know the rules of the game, it’s easier to play ball — even if you don’t like the rules,” he said.

Devising short-term tax incentives is the antithesis of creating long-term certainty — sticking to the rules of the game. Indeed, such holidays can create perverse incentives. The debate over a tax break for companies to repatriate cash from overseas, for example, has already created a new moral hazard of sorts. When Congress provided a one-time tax break in 2004 for this purpose, it said such a holiday should never be repeated.

“If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future,” Chuck Marr and Brian Highsmith of the Center on Budget and Policy Priorities recently wrote. “That will make corporations more inclined to shift income into tax havens and less likely to make investments in the United States.”

John T. Chambers, chief executive of Cisco Systems, has been a longtime proponent of such a tax holiday. “We believe that at least temporarily reducing the incremental tax rate on foreign-earned profits would encourage companies to invest in the U.S.,” he wrote on his blog last year. The company does not seem so interested in investing here at the moment; it is in the process of eliminating some 10,000 workers in the United States.

“They already have a lot of money now — they’re not going to start spending it because of a tax holiday,” Reuven S. Avi-Yonah, an international tax lawyer who teaches at the University of Michigan and has regularly testified in front of Congress, said of American companies pushing for the tax break.

One of the other ideas floating around is a temporary break on payroll taxes for employers — in addition to extending the current payroll tax holiday for employees past Jan. 1. The tax holiday for employees may make some sense: it provides extra cash directly to workers, who may put it back into the economy by spending it. A payroll tax holiday for employers is a different story. It would lower the 6.2 percent tax they pay on the wages of every worker they employ, in the hope that this would give them an incentive to hire workers.

But again, there is that little problem with demand. “Every C.E.O. and C.F.O. will tell you they will only hire when they are confident they can get sales,” Mr. Gleckman said. “They say to themselves, ‘How much can we sell with the workers we have?’ But there’s nothing a C.E.O. hates more than not being able to fill an order. Only then will they hire.”

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