After Supreme Court Ruling, Be Sure Your Arbitration Agreements Contain These Two Essential Clauses!

Hyena supreme court henry schein arbitration

I never thought hyenas essential
They’re crude and unspeakably plain
But maybe they’ve a glimmer of potential
If allied to my vision and brain

– “Be Prepared,” The Lion King

The song goes on to warn that “you can’t be caught unawares.” Be prepared. The song neglects to remind companies to check their arbitration agreements for two essential clauses, but that’s why you have me.

The Supreme Court delivered its first Kavanaugh-authored opinion late last week. It was a short, punchy, and unanimous decision with no mention of cartoon hyenas or warthogs, but it clarifies an important point under federal arbitration law: If an agreement calls for disputes to be resolved by an arbitrator, a court cannot override that contractual agreement — even to decide a threshold question like whether the dispute is subject to arbitration.

This is a case of Who decides who decides.

Many arbitration agreements contain carve-outs, saying that certain types of disputes are not subject to arbitration. A common carve-out allows parties to go to court to get an injunction to prevent imminent harm.

The issue here was whether a carve-out like that could be presumed by the court (since it was not explicitly in the agreement), or whether the arbitrator had to decide what was subject to arbitration. The court ruled:

When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.

How does this apply to you?  Two important points:

First, carve-outs: Your arbitration agreements should be drafted to include carve-outs that allow parties to go to court to seek injunctive relief to prevent imminent harm. Specific types of disputes should not be subject to arbitration. If your employee or contractor is about to reveal a trade secret, you need the ability to run to court and get immediate relief. Arbitration is too slow to prevent that danger.

Second, arbitrability: If you fear that a court might invalidate the arbitration agreement or attempt to override it, include a provision like this: “Any disputes regarding whether an issue is subject to arbitration shall be resolved by the arbitrator.”

This case was decided under the Federal Arbitration Act, which is the federal law that favors enforcement of agreements to arbitrate disputes, subject to a few limited exceptions. One of those exceptions is also now before the Supreme Court in New Prime v. Olivieri, a case we discussed here. It relates to independent contractors in the transportation industry and whether the Federal Arbitration Agreement applies. A decision in New Prime will be issued sometime this term.

Arbitration agreements are an important tool that should be in your toolbox, especially if your company is concerned about class action claims, either from employees or independent contractors.

Be prepared.

For more information on joint employment, gig economy issues, and other labor and employment developments to watch in 2019, join me in Orlando on Jan. 24, Philadelphia on Feb. 26, or Chicago on Mar. 21 for the 2019 BakerHostetler Master Class on Labor Relations and Employment Law: Meeting Today’s Challenges. Advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com. If you list my name in your RSVP, I will have your registration fee waived.

© 2019 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

 

Five Easy New Years’ Resolutions for Companies That Use Independent Contractors

new years resolutions

Now that the hangover has worn off and the calories have not, it’s time for 2019 New Years’ Resolutions. I know you didn’t ask for help, but you also didn’t not ask.

Here are some suggestions for those of you whose companies rely on independent contractors:

  1. Do you have one of those doorbells you can answer from anywhere? So do I. That’s because we’re cautious (syn., paranoid). Be similarly cautious that your non-legal, non-HR co-workers in management might retain independent contractors without your knowledge. Unleash your inner Anita Ward and make them Ring Your Bell. Set up a gatekeeper system that requires everyone to go through you before they can retain a non-employee worker. But don’t aim little cameras at their desks or you will lose friends.
  2. Update your Independent Contractor Agreements, even if you haven’t been sued yet. I am reminded of the time Bart Simpson exclaimed, “This is the worst day of my life!” and the wise yogi, Homer, responded helpfully, “–the worst day of your life so far.” (Here’s the clip.) Be prepared for if/when you are sued. Use the contract to highlight the facts that support independent contractor status. Be prepared.
  3. Don’t walk slowly in airports. This is (arguably) not directly related to the use of independent contractors, but it is important nonetheless because it drives everyone bonkers when people do it.
  4. Include arbitration clauses with class action waivers. In an alternative universe, your company has been sued by all of your independent contractors in a class action. In your reality, the contractor’s requirement to go at it alone in arbitration convinces your contractor that it’s not worth the effort to sue you, making you — who inserted the arbitration clause — the hero!
  5. Try this exercise: Do a simple self-audit. Check your company’s list of 1099 recipients for 2018 and see how many are individuals with SSNs, rather than entities with EINs. A long list with the names of a lot of individuals may be a sign that there are some independent contractor issues. That little exercise won’t burn off a single cookie, but it’s nonetheless a simple way to try to get a sense of how many independent contractors your business may have. The number is often greater than people realize.

Wishing you all a happy and healthy 2019!

For more information on joint employment, gig economy issues, and other labor and employment developments to watch in 2019, join me in Orlando on Jan. 24, Philadelphia on Feb. 26, or Chicago on Mar. 21 for the 2019 BakerHostetler Master Class on Labor Relations and Employment Law: Meeting Today’s Challenges. Advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com. If you list my name in your RSVP, I will have your registration fee waived.

© 2019 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

 

Arbitration Agreements Save Uber From Massive Class Action

uber victory arbitration agreements 2018

Two themes are often repeated in this blog: (1) Independent contractor relationships are under attack, and (2) there are a lot of things companies can do to protect themselves, but they need to be proactive, not wait until they get sued. I’ve also tried themes relating to song titles – like here (Led Zeppelin) and here (Tom Petty) – but that’s kind of not the point I’m trying to make right now.

These two themes came together nicely this week in a major ruling by the Ninth Circuit Court of Appeals. Uber earned a big win, thanks to its arbitration agreements and a May 2018 U.S. Supreme Court decision confirming that mandatory arbitration agreements should be enforced.

Uber has been a favorite target of the plaintiffs’ bar in independent contractor misclassification lawsuits. Uber has been trying to defeat class claims by asking courts to enforce the mandatory arbitration agreements signed by most of its drivers.

That fight has been going on since 2013, when a federal court in California rejected Uber’s bid to enforce its arbitration agreements. The California judge certified a class of 160,000 drivers, then certified another subclass of drivers, creating a massive class action that Uber tried to settle for $100 million. The judge in that case rejected the settlement as too small, but Uber’s long game in court appears to have paid off.

After the judge rejected the proposed settlement, the case was to proceed; but, remember, the judge had also rejected Uber’s attempt to enforce the arbitration agreements, which would have kept the matter out of court entirely. If the arbitration agreements were enforced, the drivers would have to litigate their claims individually, one-by-one, with no individual driver’s claim worth all that much money. The attractiveness of these claims for plaintiffs’ lawyers is in the massive dollars generated by consolidating tens of thousands of individual claims into class actions. Individual arbitrations do not have much lure.

In this week’s Court of Appeals decision, the arbitration agreements were upheld as valid and enforceable. Uber will not have to face this class action of 160,000+ California drivers. The jackpot settlement of $100 million is gone, and the drivers who wish to go forward will now have to pursue their claims drip-drip-drip, one-by-one, with only small amounts of money at issue in each case.

This ruling became inevitable after the U.S. Supreme Court’s Epic Systems decision in May 2018, which held that individual employee arbitration agreements are generally enforceable and do not violate workers’ rights under the National Labor Relations Act.

Based on the Supreme Court’s ruling, the Ninth Circuit Court of Appeals had no choice but to rule that Uber’s arbitration agreements were indeed enforceable, overturning the district court judge’s 2013 decision that said they were not.

The plaintiffs tried to argue that since one of the lead plaintiffs opted out of arbitration, the entire potential class should be viewed as if everyone opted out of arbitration. But the Court was having none of that. A single class representative plaintiff doesn’t have the authority to cancel thousands of other contracts that he wasn’t a part of.

The lesson here is that arbitration agreements work. They are a potent weapon in defending against and preventing massive class action risks, especially for companies that rely heavily on independent contractors for their business model.

© 2018 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.

 

Lessons from a Reggae Cucumber Song: Draft Benefit Plan Eligibility Language Carefully

ERISA independent contractor misclassification cucumber

Reggae artist Macka B has a song touting the nutritional benefits of the cucumber. The song includes verses like:

Get the cucumber cut it inna slice
Put it inna jug of water overnight
You know what you get for a fraction of the price
Energy drink full of electrolytes

I learned about this song when I asked The Google for songs about benefits. But as much as I like the song (youtube here), this post is about a different kind of benefits.

One of the biggest risks of independent contractor misclassification is having to provide employee benefits to workers you thought were independent contractors. If it turns out those workers were misclassified and are really employees, they may suddenly be eligible for all sorts of employee benefits, including retirement plans like 401(k) match and employee stock ownership. And they’ll be eligible retroactively. This can be expensive. A goof of this type cost one major corporation $97 million back in the late 1990s.

As one recent federal court decision from Georgia reminds us, businesses can avoid this risk with careful drafting in its benefit plan document.

Continue reading

You can’t pay for English whales (the queen owns those), but you should pay summer interns – as employees, not contractors

Whale summer internships paid unpaid employee independent contractorSome things you can’t pay for. All of the whales and sturgeon that live in English waters, for example, belong to the queen. Under an English statute from 1324, “The king shall have wreck of the sea throughout the realm, whales and sturgeons taken in the sea or elsewhere within the realm, except in certain places privileged by the king.”

So if you wanted to buy an English whale this summer, you may be out of luck. U.S. business should be spending their money elsewhere — like on summer interns! Yes, let’s talk about summer interns. Paid or unpaid? Employee or independent contractor? Have I captured your attention? I knew it. Read on.

Paid or unpaid? The rules have been changing to make it easier to have unpaid interns, provided the internships have educational value and are not for the benefit of the business. This post provides some guidelines. The bottom line, though, is that it’s safest to pay your summer interns. Continue reading

Epic Ruling Clears Path: Arbitration Agreements Can Save Millions in Independent Contractor Misclassification Claims

Arbitration agreements for independent contractorsToday in the Epic Systems case, the Supreme Court ruled 5-4 that in employer-employee relationships, mandatory arbitration agreements with class action waivers are lawful.

A class action waiver means that employees cannot file class actions. They must instead bring any claim individually to arbitration, one person at a time, even if there are a lot of others in the same situation.

The issue before the Supreme Court was whether the employers could require employees to sign these agreements.

  • The argument for allowing the agreements was that the Federal Arbitration Act (FAA) favors arbitration as a way to resolve disputes and says that most attempts to invalidate arbitration agreements are against the law. But there are narrow exceptions.
  • The argument against allowing the agreements was that the NLRA grants workers the right to engage in protected concerted activity, and filing class actions (they argue) is a type of protected concerted activity.

The court had to decide whether the NLRA’s right to engage in protected concerted activity created an exception to the FAA’s rule favoring arbitration. As expected, the conservative court held that mandatory employee arbitration agreements — including class action waivers — are lawfulIn other words, businesses may require their employees to sign away their right to bring class actions. Read that again slowly. It’s important.

What does this mean for independent contractor agreements?

The decision does not directly address independent contractor agreements, but the decision does say that the Supreme Court has rejected every other challenge to the FAA’s policy favoring arbitration.

It seems pretty safe, then, to assume that the Court would allow mandatory arbitration agreements, with class action waivers, in independent contractor agreements.

Should businesses include mandatory arbitration provisions in independent contractor agreements?

There are pros and cons to arbitration, and the answer depends largely on how reliant your business is on independent contractor relationships as part of the business model. In other words, are you at risk of a class action?

If yes you are, then yes you probably should. (But please consult counsel.)

Businesses that may be at risk of a widespread finding of independent contractor misclassification can use these agreements to prevent class actions from being filed. If contractors who claim misclassification have to bring their claims individually, there is a lot less money at stake and, strategically, the incentive for plaintiffs’ lawyers to take these cases is greatly diminished. Few lawyers will take a case that may be worth a few thousand dollars (or often less). Most lawyers would love a case that may be worth a few million dollars. The difference is in the numbers. Class action waivers can greatly reduce your company’s risk of a large misclassification verdict.

Other advantages of arbitration include:

  • The results of individual arbitrations can be kept confidential, unlike court decisions. That means a finding against you will not hit the social media feeds or trade publications;
  • The parties select the arbitrator, which means you can ensure that your fact finder is a lawyer or has a background in the industry or type of dispute involved;
  • There’s no risk of a runaway jury, populated by regular folks who might have an axe to grind and no sense of the value of money;
  • The dispute gets resolved quickly, with finality, and with no right to appeal (except in very limited circumstances)

But there are potential downsides to arbitrations too:

  • Filing fees can be expensive;
  • Arbitrators can be expensive too. They get paid by the hour, unlike a judge who is not being paid by either side (we hope);
  • The barrier for employees to bring a claim is lower. They don’t need an attorney, and they can initiate a claim with ease, which could mean that more individual claims would be filed than if employees had to go to court;
  • There is no right to appeal (except in limited circumstances). This is both an advantage and a disadvantage, depending on whether you win!

Arbitration agreements have pros and cons, but for businesses that make substantial use of independent contractors, an arbitration agreement with a class action waiver can be critically important in avoiding a large claim.

One final reminder: If you use an mandatory arbitration agreement, remember to include a class action waiver. That’s one of the main benefits of these agreements.

Please consult with your employment lawyer to decide whether arbitration agreements are right for your business.

© 2018 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.

California’s New Killer Bee: How Should Businesses Deal with Part B of California’s New Independent Contractor Test?

California ABC test Dynamex Killer Part BAccording to pestworld.org, Africanized honey bees have been known to chase people for more than a quarter mile once they get excited and aggressive. This is why they earned the nickname “killer bee.”

In its recent Dynamex decision, the California Supreme has introduced its own Killer B into California wage and hour law. This new Killer B could make plaintiffs’ lawyers excited and aggressive, chasing down businesses that use independent contractors and filing lawsuits alleging they are really employees. Those lawsuits could really sting!

Today we look at two questions: What is the new Killer Part B, and what do businesses need to know about it?

What’s the Issue?

Several states now use ABC Tests to determine whether a worker is an employee or independent contractor, at least under certain state laws. California joined the party with its 4/30/18 Supreme Court decision (Dynamex), adopting an ABC Test to determine who is an employee under most of California’s wage and hour laws.

Part B of the new California test can be difficult to meet. To be a true independent contractor, the worker must be performing work that is outside the hiring party’s “usual course of business.” We’ll call this a Strict ABC Test.

Some states have a more forgiving version of an ABC Test, allowing Part B to be satisfied if the worker performs the services either outside the usual scope of business or off of the hiring party’s premises. New Jersey, Illinois, and Connecticut use the more forgiving test. We’ll call that version the Standard ABC Test.

What’s the Concern with Part B in California’s New Test?

Part B can be hard to meet.  Lots of workers who are otherwise independent contractors will be considered employees because of Part B — especially under a California-style Strict ABC Test. If the type of services being provided are within the hiring party’s “usual course of business,” the worker must be treated as an employee under California’s wage orders.

Although this Strict ABC Test is new to California employers, it’s not new to multi-state employers. Massachusetts has been using a Strict ABC Test for its wage and hour laws since 2004, when it passed the Massachusetts Independent Contractor Law. In 2008, the Massachusetts Attorney General’s Office issued an advisory memo on its interpretation of the law, especially Part B.

What Can We Learn From Massachusetts?

The key to success under Part B is establishing that the contractor’s services are outside of the “usual course” of your business. That means the contractor does something that your business doesn’t do.

Companies should consider taking steps to define more precisely its “usual business,” and then memorialize that in multiple ways — internally, externally (website: About Us page?), and contractually in agreements with independent contractors.  Keep in mind the importance of differentiating between the scope of what your business does and the scope of what the independent contractor will be doing.  If you want to satisfy Part B, these things should be different.

You may need to define the scope of your services more narrowly. For example, if your business sells appliances but retains independent contractors to install them, you might take steps to define the scope of your business as “selling appliances but not installing them.” Consider adding language to your contracts, website, and other documents to make this distinction clear.

This is just one of many strategies that businesses in California and Massachusetts should be prepared to implement. Being proactive is the key to avoiding claims of independent contractor misclassification. Evaluate and modify your independent contractor relationships and contracts now, not after you have been sued.

© 2018 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.