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.

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Can You Require Independent Contractor Drivers to Sign Arbitration Agreements?

Arbitration agreementstranspiortation industry drivers new prime v oliviera coin tossHow do you want your disputes decided? State court? Federal court? Arbitrator? Coin toss?

Ok, probably not coin toss, but that method is still used to break ties in local elections. (Spoiler alert: It was heads.)

Lots of businesses using independent contractors rely on arbitration agreements (with class action waivers) as a way to protect against a claim of independent contractor misclassification. Arbitration agreements with class action waivers prevent large groups of contractors from joining together in court to file class action lawsuits.

Instead, they have to bring any claims on their own. That means much less money is at stake in any individual case, and much of the incentive for hungry plaintiffs’ lawyers to file these claims is gone. (So sad.)

When bound by an arbitration clause, some plaintiffs have pointed out that there is an exception under federal arbitration law that applies to transportation workers. The Federal Arbitration Act, which is the federal law favoring arbitration, doesn’t apply to employees in the transportation industry.

Most courts have said this exception applies only to employees, not to independent contractors. In other words, employees in the transportation industry might not have to arbitrate their claims, but independent contractors do.

A recent court of appeals decision, though, may have changed that. The First Circuit Court of Appeals decided that the FAA transportation worker exception applies to employees and independent contractors. If true, the implications for the gig economy could be massive. Independent contractor drivers are all over the transportation industry. (Some might not be in interstate commerce, but that’s a technical argument for court, not for a blog.) Uber, Lyft, FedEx. They have all switched to using mandatory arbitration agreement with their independent contractor drivers.

The Supreme Court has agreed to decide this important issue in a case called New Prime Inc. v. Oliviera.

The Court just accepted the case last week, so we won’t have a ruling until next spring or summer, but this is an important case to watch for any business using independent contractors in the transportation industry. Will your arbitration agreements survive?

The issue accepted by the Supreme Court for review is:Whether the FAA’s Section 1 exemption, which applies on its face only to ‘contracts of employment,’ is inapplicable to independent contractor agreements.”

Note for Supreme Court Watchers: This is a separate issue from the Epic Systems case already heard by the Supreme Court, which should be decided by this June. In Epic Systems, the issue is whether the National Labor Relations Act prohibits businesses from requiring their employees to sign mandatory arbitration with class action waivers. The issues are somewhat related, but distinct. Epic Systems deals with employees’ arbitration agreements; New Prime deals with independent contractors and is limited to the transportation industry.

For more information on independent contractor issues and other labor and employment developments to watch in 2018, join me in Cincinnati on March 28 for the 2018 BakerHostetler Master Class on Labor Relations and Employment Law: A Time for Change. Attendance is complimentary, but advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com, and list my name in your RSVP so I can be sure to look for you.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

NLRB Smells Something Rotten, Seeks Input on Major Misclassification Decision

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Screenshot from metro.co.uk

A flight from Dubai to Amsterdam made an emergency landing last week after a fight broke out over a passenger’s excessive flatulence. The two Dutchmen sitting next to the flatulator asked him to cut it out, but he wouldn’t (or couldn’t) stop spreading his perfumery around the cabin. A fist fight broke out and the pilot diverted the flying stinkship to Vienna, where several passengers were removed. Read more here.

Something smells rotten to the NLRB as well, four months after an Administrative Law Judge (ALJ) ruled that independent contractor misclassification, by itself, can be an unfair Continue reading

Is Your Independent Contractor Agreement Like an Emotional Support Peacock?

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Image from The Jet Set

My favorite news story from last week was United Airlines’ decision not to allow a woman to fly with her emotional support peacock. Peacocks are pretty, strutting their feathery stuff to attract the smokin’ hot peafowl ladies, but they’re not cuddly, and they don’t belong in the tight quarters of commercial aircraft.

I did my research here, and I can confirm they’re not even good house pets. According to an Information Leaflet published by the Wrexham County (U.K.) Borough Council, peafowl have not taken well to modern methods of human transport. The Leaflet warns potential peafowl pet owners, “Peafowl for some reason are fond of cars and enjoy standing on them. They will also attack their reflection in cars and cause damage by scratching and pecking them.” They also have a “very loud high-pitched meow like call.”

None of this sounds like what I want in a seatmate on a commuter flight out of Newark.

Anyway, the point here is that looking pretty isn’t enough. Continue reading

Here’s a Tip a Cartoon Cat Would Love: Try This Edit to Your Independent Contractor Agreements

Independent contractor misclassification cat“Whenever he gets in a fix, he reaches into his bag of tricks!” Yes, boys and girls, I am talking about Felix the Cat, whose magical bag of tricks could be transformed to get him out of any treacherous situation. Don’t you wish you had one of those?

Well, I won’t share mine, but I can offer this tip, which may help you avoid a treacherous situation.

This weekend I was reading a California decision on independent contractor misclassification. (I do other, more fun things in my free time too, so don’t make fun. Ok, you should make fun a little.) While analyzing Right to Control factors, the court ruled that the worst fact for the business was that it could terminate the contractor at will. The ability to terminate a relationship at will, the court ruled, was the “ultimate” form of control! Really? I agree it’s a factor among many, but the “ultimate factor”? Come on.

Anyway, this problem is easily avoided with some creativity. Allow me to reach into my bag of tricks.

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Don’t Wear Pajamas to Work: Be Careful Using “Statutory Minimum” Workers Comp Clauses in Subcontractor Agreements

Pajamas - Independent Contractor Agreements and Workers Compensation ClausesHave you ever had the dream where you show up at work or school in your pajamas or underwear? You’re exposed and embarrassed in the dream, and you can’t figure out why you forgot to put on regular clothes, right? (Please don’t tell me I’m the only one who’s had this dream. Please?)

You may be living this dream inadvertently in your vendor or subcontractor agreements. (And this is not what people mean when they say, “I’m living the dream!”)

Here’s the problem:

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Court Rules that New Jersey is a Goat (sort of): a Note on Forum Selection Clauses

goat independent contractor misclassification forum selection clause Mary Kay caseThe Monty Hall puzzle is a brain teaser based on the game show, Let’s Make a Deal. The contestant is presented with three doors and must choose one. Choose the correct door and win a car. Choose either of the wrong doors and win a goat. (Note to rural readers: The puzzle is a first-world conundrum and assumes you’d prefer the car.)

Once the contestant chooses, the host opens one of the doors with a goat and asks the contestant whether he wants to stay with his original choice or choose the other unopened door. As explained here, the contestant should always switch doors, since switching provides a 2/3 chance to win. The math here is not intuitive, but read about it and you’ll understand.

The gimmick relies on the fact that the host knows what’s behind each door and will only reveal a door that hides a goat. The host never reveals a car.

Continue reading