This is how to update the firmware on the NXT using LabVIEW for LEGO® MINDSTORMS (LVLM) or LabVIEW for Education (LV4E).
1. First go to tools and select NXT Terminal:

This window will pop up:

2. Select "Update Firmware" and this window should appear:

3. Press "Update" and wait a minute or so, and you're done!
Here are some important notes for updating the firmware:
- All files and programs you have on the NXT will be deleted.
- While updating the firmware the NXT will turn off.
- Don't unplug the NXT while updating, otherwise you risk ending up with an NXT with destroyed firmware.