Use a Sea Slug’s Secret Superpower When Drafting IC Arbitration Clauses

Witness: The severed head of a sea slug. Image by Sakaya Mitoh, who performed this awesome experiment.

Did you know that sea slugs have superpowers?

According to researchers at the Nara Women’s University in Japan, if you sever the head of a certain type of slug, the slug can grow a new body, organs and all. I like that as the basis for a new Marvel character. Or maybe the slug is a distant cousin to Roland the Headless Thompson Gunner.

The moral of the story is that when a slug loses its head, all is not lost. (This is how sea slugs survived the French revolution.) The same may be true in the context of arbitration agreements for independent contractors. (Come on, that’s a really good segue, isn’t it?)

For independent contractors in the transportation industry, arbitration agreements may be unenforceable under federal law. But all is not lost. In some states, state arbitration law can save the day. That means it’s important to know your state laws and to draft choice of law clauses carefully.

Here’s what I mean:

For companies that work extensively with independent contractors, there are lots of good reasons to require that disputes are resolved in arbitration, not in court. One of the biggest advantages of arbitration is the ability to include a class action waiver, requiring any claimant to bring a case on an individual basis only. No class actions. Class claims are the sexiest of all claims to plaintiff’s lawyers. Individual claims are not nearly as lucrative. Or sexy.

The Federal Arbitration Act (FAA) embraces arbitration as an enforceable way to resolve disputes. But there’s a big exception to the FAA. It doesn’t apply to transportation workers “engaged in … interstate commerce.” The meaning of that phrase is unclear, and there are lots of lawyers fighting about its scope. Different courts have come to different conclusions, especially regarding last mile delivery drivers and rideshare. Eventually, the Supreme Court is likely to rule on exactly what this phrase means.

But in the meantime, what if your contractors are arguably “engaged in … interstate commerce”? Are you stuck with a lengthy legal battle over whether your arbitration agreement is enforceable under the FAA?

Not necessarily. Don’t forget about state law. Several states have their own laws embracing arbitration as an enforceable way to resolve disputes, and these state laws generally do not have exceptions for transportation workers.

New York is a good example. Courts in New York have upheld arbitration agreements, even when the workers were arguably transportation workers not covered by the FAA.

Choose your state law carefully, especially if your arbitration agreement might be subject to the FAA’s exception for transportation workers. It’s common to include a “choice of law” clause in contracts, but those clauses are often dropped into contracts without anyone thinking about why a certain state’s law should apply. Those clauses really do matter, and the choice of law section should be carefully considered.

When it comes to arbitration agreements, the choice of law clauses should not be viewed as a boilerplate clause to toss in without careful thought.

The ability to choose a particular state’s law is a real superpower. Use it like a sea slug!

© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Shout It Like a Helium-Filled Gator: Don’t Limit Your Arbitration Agreements to Work-Related Disputes

Fig. 3. Atmosphere exchange during the experimental procedure without handling the subject

A team of researchers studying the vocalizations of Chinese alligators have won an Ig Nobel Prize for their method. They put the gators in helium-filled tanks and observed variations in their calls.

Sign me up.

I want to write papers with sentences like this one: “High-energy frequency bands in the bellows of the Chinese alligator were shifted towards higher frequencies when the animal vocalized in the heliox condition.”

My writing, for better or worse, is more focused on agreements. Here’s something to remember when writing arbitration agreements.

One of the main benefits of an arbitration agreement is the ability to prohibit class action lawsuits. When using arbitration agreements with employees or independent contractors, don’t forget to include the class action waiver. (There are pros and cons to mandatory arbitration, but we’ll leave that for another day.)

Too often, the scope of arbitration agreements is too narrow. Many agreements require arbitration of work-related or employment-related claims only.

Go broader. Expand your range, but without using helium.

In this case, a group of drivers alleged that a rideshare app company mishandled a data security breach. The drivers tried to bring a class action.

The court instead required them to seek relief one-by-one, in individual arbitration actions. That’s because their agreements required them to arbitrate disputes with the company and prohibited class litigation. The arbitration agreement here was broad enough to cover data breach claims.

Quick side note on what the legal dispute was really about: The drivers argued that the agreements were unenforceable. They pointed to the transportation worker exception in the Federal Arbitration Act (FAA). The FAA generally protects the enforcement of arbitration agreements, but it doesn’t apply to transportation workers in interstate commerce. The dispute was whether drivers who pick up passengers at airports for local rides are acting on interstate commerce because the passengers and their luggage flew in from other states. The district court said no, that these local drives are not interstate commerce, and the Ninth Circuit Court of Appeals agreed.

For our purposes, the lesson here is to be thoughtful about the scope of claims subject to arbitration. Go broader than just work-related claims. A data breach can be an expensive class action to defend if thousands of people are affected. Any single individual arbitration, however, is probably not worth the effort for a plaintiff’s lawyer. The damages for an individual arbitration will be too small to make it worth pursuing.

(The “go broad” concept has limits, and there are some claims that should be carved out of arbitration agreements, so I don’t want to overstate the point.)

Anyway, be creative and thoughtful when drafting agreements. Be sure the scope of covered claims is sufficiently broad. Careful planning can avoid class actions — or just maybe it can win you an Ig Nobel Prize.

Bonus track: Here’s audio of a helium-induced alligator bellow.

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

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Identity Unclear? Court Adds to Confusion for Enforcing Arbitration Agreements

chickenZoanthropy is a mental disorder in which a person believes he or she is an animal. In this recent case, a 54-year old Belgian woman mistook herself for a chicken. The rare condition — and the woman’s clucking — stopped suddenly when she had a seizure, which apparently is a decidedly un-chickenlike thing to have.

Identity crises continue to plague the courts too. As we reported here, arbitration agreements can become unenforceable when applied to drivers of goods, if those drivers are in “interstate commerce.” What it means to drive in “interstate commerce” is not so clear. We reported last month on seemingly contradictory decisions by the New Jersey Supreme Court and the First Circuit Court of Appeals.

Last week, the Seventh Circuit Court of Appeals muddied things up more, ruling that GrubHub’s arbitration agreements with independent contractor drivers were enforceable, meaning that drivers who sued, claiming employee status, had to bring their claims individually through arbitration, not in a class action in court. The court ruled that these local food delivery drivers were not driving in “interstate commerce.” (Tip: If you’re craving fries, order from a fast food joint in your home state. )

That’s a nice win for GrubHub and for the enforcement of arbitration agreements in general.

Eventually, the Supreme Court is going to have to sort this out and tell us when drivers of goods are in “interstate commerce” and when they are not. Courts have tried to draw distinctions around whether the drivers cross state lines, whether the goods cross state lines even if the drivers do not, and whether the goods were “at rest” before being driven the last mile. We have different standards being used by different courts in different states — even though they’re all just trying to interpret the meaning of an exception in a federal law, the Federal Arbitration Act.

The end result is that companies using arbitration agreements with drivers of goods may — or may not — be able to enforce their arbitration agreements under the Federal Arbitration Act.

For now, confusion reigns. But at least our Belgian chicken lady is back to normal. OddityCentral reports that some cases of zoanthropy have lasted decades.

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

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Up North, Uber Can’t Make Drivers Go to Amsterdam to Sue. (Wait, What?)

exposI bought a Montreal Expos t-shirt last week. Why? I needed some new work clothes.

I’ve been emailing with a friend in Ontario about the difference between the U.S. and Canada when it comes to coronavirus precautions, and we both agree it’s a good idea to keep the border closed for now. Did you see the Maid of the Mist pictures showing the Canadian boat with six well-distanced (and undoubtedly polite) passengers and the American boat packed like it’s 2019. Canada has hardly any cases. Anyway, I digress. As usual.

While Canada is on my mind, I’ll share a recent decision by the Supreme Court of Canada. The ruling will allow a proposed $400 million class action against Uber to proceed in Ontario on the issue of whether drivers are misclassified as independent contractors.

At issue was the validity of Uber’s arbitration agreements for drivers in Canada. The agreement required drivers to arbitrate any disputes in Amsterdam, following the rules of the International Chamber of Commerce and Netherlands law. Wait. What? Yes.

And there’s this: Filing a case would cost a driver US $14,500 in up-front administrative fees.

The Court’s opinion called the arbitration clause “unconscionable,” and Uber responded by confirming to The Star that it planned to update its arbitration agreements accordingly.

Gig economy platforms are under attack in Ontario, much like in the U.S. Think of Ontario as Canada’s version of California or Massachusetts but with better access to poutine.

According to The Star, the Ontario labour relations board ruled earlier this year that couriers for a food delivery app were not true independent contractors and therefore had the right to join a union. Drivers using the Uber Black platform are also challenging their classification as contractors. American expats are challenging the use of a superfluous U by the labour relations board.

Lesson: If you’re going to require arbitration, be reasonable. Amsterdam might be a nice place to visit (see the Vondelpark!), but it’s too much of a stretch to require an Ontario rideshare driver to go there to file a claim. Next time, try Greenland?

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

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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.

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Octopus vs. Bald Eagle: Postmates to Defend 5,225 Individual Arbitration Claims

Bald eagle octopus postmates

The best laid plans can sometimes take an unexpected turn for the worse. Just ask this octupus.

Earlier this month, off the coast of Vancouver Island, an octopus was settling down for a meal consisting of one whole bald eagle, freshly caught but still alive. A team of nearby salmon fishermen heard the bald eagle’s screams and, having been trained in speaking eagle, immediately recognized the distress call. The salmon fishermen sprang into action. They poked the soft-bodied mollusc with a pole until it released the bird. The eagle survived, and the fishermen got some footage that made it onto CNN’s website.

While I love octopi (delicious when grilled), I like to think that I too would have favored the eagle when interfering with a battle sponsored by mother nature.

The delivery app company Postmates is also dealing with an unexpected turn of events, but this one involves no sea creatures or birds of prey. In defending a claim of independent contractor misclassification brought by thousands of delivery drivers, Postmates prevailed in showing that the drivers were bound by arbitration agreements with class action waivers. If the drivers wanted to proceed, they would have to arbitrate their claims one-by-one, all 5,225 of them.

Guess what happened next.

The plaintiffs’ firm representing the drivers filed 5,225 individual arbitration claims with AAA.

Faced with having to pay $10 million in arbitration filing fees, Postmates has been trying to figure out how that would work. Can AAA even handle 5,225 simultaneous arbitrations? After Postmates missed an initial AAA payment deadline, the plaintiffs’ firm filed a motion to hold Postmates in contempt for not paying the AAA fees.

Postmates is now defending the contempt motion and trying to figure out, logistically, how to proceed.

Arbitration agreements can be helpful to businesses that have lots of independent contractors, mainly because the agreements can include class action waivers. But this dispute shows the potential downside of class action waivers. A sophisticated plaintiffs’ class action firm can file thousands of simultaneous arbitration demands, flooding the system and leaving the company on the hook for millions of dollars in filing fees alone — before even getting to the merits or defense of a claim.

We’ll see how this one plays out. It’s an unexpected turn of events, much like the octopus getting poked by an eagle-defending salmon fisherman at dinner time.

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© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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California’s New Anti-Arbitration Law: A Hotbed of Problems

California continues to be a hotbed of activity, which got me wondering: what is a hotbed? So I looked it up.

Hotbed – noun – hot·bed |  \ ˈhät-ˌbed

/a bed of soil enclosed in glass, heated especially by fermenting manure, and used for forcing or for raising seedlings/

And now you can decide which is more useful- knowing what a hotbed is or keeping up with the latest legislation in California that makes things harder for businesses.

The latest is AB51, which bans mandatory employee arbitration agreements if they are made a condition of employment. Voluntary arbitration agreements are still permitted.

So let’s just include an opt-out provision, right? That way there’s a choice, so it’s not mandatory. That would seem to make sense. Not so fast. The law says that if you include an opt-out provision, it still counts as mandatory. Huh? That’s contrary to the meaning of opt-out.

Opt – verb \ ˈäpt

/to make a choice/

If the option to opt-in is voluntary, then the option to opt-out is voluntary. Grammarians needed in California please.

The law is also probably illegal, except maybe for jobs in the transportation industry. According to the Supreme Court, the Federal Arbitration Act (FAA) prohibits states from enacting laws that treat agreements to arbitrate differently than other agreements. If the parties agree to arbitrate, there’s an enforceable contract, and the states need to get out of the way. That’s a bit of an oversimplification, but not by much. The FAA doesn’t apply to portions of the interstate transportation industry though, so the California law might be enforceable only as to that small segment of jobs. The enforceability of this law will be tested in the courts.

The law also creates a chicken-and-egg problem for independent contractor misclassification disputes. You can still require in an independent contractor agreement that an independent contractor must arbitrate disputes. And in that arbitration agreement, you can grant the arbitrator the authority to rule on any questions about enforceability of the arbitration agreement.

But what if the dispute is over whether the independent contractor is an employee? If the California law stands, then the agreement to arbitrate the dispute is enforceable only if the arbitrator rules that the contractor is properly classified as a contractor, but the agreement to arbitrate is unenforceable if the arbitrator rules that the contractor is misclassified and should really be an employee. But if the arbitrator rules that contractor was really an employee, then under California law the agreement granting the arbitrator the right to make that decision is void. You’d have to decide the ultimate issue — independent contractor s employee — before determining who decides whether the worker is a contractor or an employee.

Is your head spinning? Good. Just in time for Halloween.

Thanks California. You give me lots to write about.

This new law applies to employee arbitration agreements entered into after January 1, 2020– unless it’s not enforceable at all. We’ll see.

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© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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