Do Not Break Glass: Arbitration Clauses May Shatter in Agreements with Independent Contractor Delivery Drivers

largest-glass-blown-sculpture

Photo: CGTN/CFP

When your kids were little, did they ever run around in places they shouldn’t, causing you to fear what would happen if they broke something? Well you’re not alone. The world’s largest glass-blown sculpture sits in a museum in Shanghai. At least it did until recently. On May 30, two children accidentally broke it while running through the museum playing. There was a protective belt to try to prevent this sort of thing, but the kids ran right through it.

The moral of the story is that protective belts are not always good enough. The same is true when it comes to independent contractor agreements. One of the most useful protective belts we can install to protect against misclassification claims is a well-drafted arbitration clause with a class action waiver. That forces any independent contractor who claims to be an employee to fight that battle on an individual basis in front of an arbitrator. No court, no class action.

But this protective belt doesn’t always work, especially in the transportation industry.

Arbitration agreements with class action waivers work well in most industries. Under the Federal Arbitration Act (FAA), these agreements are generally enforceable, and they’ve saved many a large company from having to face gigantic misclassification class actions.

But the FAA has an exception. It doesn’t apply to transportation workers engaged in interstate commerce. There’s been lots of litigation over what that means and how broad the exception is.

A pair of decisions last week tried to address this question with respect to last-mile delivery drivers.

Both cases assumed the last-mile drivers were transportation workers engaged in interstate commerce, even though they generally did not cross state lines.  (We don’t know how the US Supreme Court would rule on that question). Since the FAA did not apply, the question then became whether the arbitration clauses and class action waivers were enforceable under state law.

Two courts, two cases, and two states resulted in two very different outcomes.

The New Jersey Supreme Court ruled that arbitration agreements with delivery drivers are enforceable under New Jersey Arbitration Act, even if not under the Federal Arbitration Act (FAA).

But a federal appeals court took the opposite view of the same issue under Massachusetts law, ruling that a class action waiver in an arbitration clause is void because it is contrary to Massachusetts public policy.

So what does this mean for companies who use independent contractors in the transportation industry?

Depending on the facts and the court, the FAA might or might not apply. If the FAA does not apply, the question of whether the arbitration clause and class action waiver can be enforced will depend on state law.

That means companies need to be very careful in drafting their choice of law provisions and their severability clauses. If parts of the arbitration clause are unenforceable because of the class action waiver, will the whole clause be cut or just the class action waiver? If a court severs only the class action waiver, could you end up in class arbitration? The contract should also anticipate that possibility, and the arbitration clause should contain language prohibiting the arbitrator from hearing a class action. The effect of that clause would be to force the class action back to federal court. Most companies, if faced with a class action, would prefer to defend class claims in court rather than in arbitration.

These two cases highlight the importance of considering these issues when drafting independent contractor agreements in the transportation industry. While different state laws may lead to different outcomes, your contract should plan for the worst and be written to protect against the least desired outcome.

And if you are put in charge of security at a museum, try a better protective belt.

© 2020 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Enter your email address to follow this blog and receive notifications of new posts by email.

2018_Web100Badge