Supreme Court Decision in “New Prime” May Have Limited Impact on Independent Contractor Misclassification Claims, Despite Some Commentators’ Exuberance and Others’ Despair

Shortly after the issuance of the Supreme Court’s decision earlier today in New Prime Inc. v. Oliveira, some commentators have referred to it as a watershed opinion preserving the right of workers including independent contractors to have their class action cases heard in court instead of before an arbitrator. Others have lamented the decision, worried that the Supreme Court has now foreclosed the right of companies to compel employees and independent contractor to arbitrate their workplace disputes under arbitration agreements the workers have signed.  But the Supreme Court’s decision may have little or no impact as to whether workers classified as independent contractors can be compelled to arbitrate their IC misclassification claims.

Why? Because the decision by the Supreme Court is limited to the Federal Arbitration Act (FAA) and turned on language found in Section 1 of the FAA that excludes from its coverage several types of transportation workers that are involved in interstate commerce.  In contrast to the FAA, state arbitration laws generally do not exclude those workers.  Thus, the New Prime decision may have little or no impact on the rights of companies to compel arbitration of any other workers’ disputes – whether the workers are classified as employees or independent contractors or whether they are involved in interstate transportation – if the company seeks to compel arbitration under a state arbitration law, instead of or in addition to the FAA.

Some lawyers representing workers – both employees and independent contractors – may argue that the federal arbitration law preempts these state laws.  But the courts generally have found state arbitration laws to be preempted by the FAA, which is intended to promote arbitration, only in instances where a state law places limits on arbitration – and it is likely that few if any state arbitration laws exclude transportation workers engaged in interstate commerce.

The Two Issues Decided By the Supreme Court  

The precise issue decided first by the Supreme Court in New Prime was whether a court or arbitrator should decide whether a transportation worker is excluded from the provisions of the FAA.  Justice Neil Gorsuch, who authored the decision, concluded that the courts, not an arbitrator, must decide the exclusion issue – even if the arbitration agreement directs this issue to the arbitrator to decide.  According to the Court’s opinion, before a court considers invoking its power to compel arbitration and “stay” litigation under the applicable sections of the FAA, it must determine if a worker is excluded under Section 1 of the FAA as an interstate transportation worker.  If the exclusion applies, the court cannot compel arbitration under the FAA.

New Prime, an intermodal trucking company, had argued that the threshold question of whether the exclusion applied should be determined by an arbitrator.  In rejecting that argument, the Supreme Court stated that the parties could not, by agreement, bypass the interstate transportation worker exclusion in Section 1 of the FAA.  According to Justice Gorsuch:  “The parties’ private agreement may be crystal clear and require arbitration of every question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum.”

The second issue decided was whether the exclusion for “contracts of employment of . . . [transportation] workers engaged in . . . interstate commerce refers only to contracts between employers and employees or also covers contracts between companies and independent contractors.” The Court examined the meaning of the term “contract of employment” at the time the FAA was enacted in 1925.  It concluded that dictionaries at the time “tended to treat ‘employment’ more or less as a synonym for ‘work.’”  The Court also found that Supreme Court cases in the early 20th century used the phrase “contract of employment” to describe “work arrangements involving independent contractors.”

The Supreme Court did not decide, though, whether Mr. Oliveira or any a particular worker – either an independent contractor or an employee – would be excluded under Section 1 of the FAA.  Mr. Oliveira and New Prime agreed that he was an interstate transportation worker.  That issue was not before the Supreme Court and now is left for the lower courts to decide in cases where the parties are in disagreement over the application of the exclusion to a particular worker or class of workers.  It is likely  plaintiffs’ class action lawyers will attempt to expand the reach of the exclusion by  characterizing a host of workers as being involved in the interstate commerce transportation industry. However, even if an individual or group of workers is excluded under the federal arbitration law, state arbitration laws may cover them and provide a statutory basis for compelling arbitration.

Takeaways and Tips

Many companies utilizing independent contractors have included arbitration clauses with class action waivers in their IC agreements. More have done so following last year’s decision by the U.S. Supreme Court in Epic Systems Corp., which upheld mandatory arbitration provisions for workplace claims.

Plaintiffs’ class action lawyers regularly challenge arbitration clauses with class action waivers; they regard them as a huge impediment to their ability to vindicate worker rights, including claims asserted by workers who allege they are employees misclassified as independent contractors.  In contrast, businesses using arbitration agreements view them as a means to curtail the misuse of class actions used to exact costly settlements in circumstances where only a few members of the class truly feel aggrieved.

The effort by the plaintiff in the New Prime case was successful, but only because the worker and the company both agreed that Mr. Oliveira was an independent contractor and was engaged in an interstate transportation industry.  That invoked the exclusion in Section 1 of the FAA, which forecloses arbitration under that federal law. If New Prime had instead sought to compel arbitration under a state arbitration law instead of or in addition to the FAA, it might have secured a court order compelling arbitration of the worker’s claims.

Thus, the first practice pointer for lawyers to consider is predicating a motion to compel arbitration on the applicable state arbitration law, if the worker is unquestionably a transportation worker involved in interstate commerce.  If, however, an argument might be advanced by the worker’s counsel that the plaintiff may be excluded under the FAA (or if it is indisputable that the worker is not involved in an interstate transportation industry), a company may wish to base a motion to compel not only on the FAA but also on an applicable state arbitration statute.

Of course, this strategy assumes the arbitration clause in issue is free from other challenges.  As noted in our blog post of November 14, 2018 entitled “How to Effectively Draft Arbitration Clauses With Class Action Waivers in Independent Contractor Agreements,” plaintiffs’ class action lawyers have been very creative in their efforts to undermine efforts by companies to arbitrate cases and limit class actions.

In that blog post, we discussed in detail ten tips to be utilized in appropriate circumstances to minimize challenges to arbitration clauses with class action waivers.  Those suggestions can be summarized as follows:

1. Any arbitration agreement with a class action waiver should specifically recite that the arbitrator is not given authority to conduct class arbitration.

2. Make sure the arbitration clauses can withstand unconscionability arguments.

3. Don’t bury arbitration clauses deep within independent contractor agreements.

4.  Place jury trial waivers in ALL CAPITAL LETTERS, or bold type, or larger size typeface, and state that the arbitration clause means that disputes will not be decided by a court or jury.

5. Avoid selecting a particular state’s law as the parties’ contractual “choice of law” if that state’s law contains an unfavorable test for independent contractor status.

6. Make sure the arbitration clause in an IC agreement specifically designates as third-party beneficiaries all of the clients and customers of the business.

7. Draft a state-of-the-art “delegation” of authority provision. The so-called “delegation” clause confers upon arbitrators the authority to decide certain issues – but as we learned in the New Prime decision, not whether a worker is excluded by Section 1 of the FAA.

8. Keep tabs on changing laws and modify any choice of law provision in IC agreements when there has been an unfavorable change in the independent contractor laws of the state selected as the choice of law.

9. Ensure your arbitration provisions are up to date, taking advantage of the newest legal developments in this area of the law.

10. Keep abreast of new statutes affecting arbitration of independent contractor and wage and hour disputes.

There are dozens of other tips that practitioners should consider to increase the odds of compelling arbitration of class action claims by workers claiming they have been misclassified as 1099ers. But perhaps the most important suggestion is one intended to minimize the likelihood of an IC misclassification lawsuit being brought in the first place: enhance the company’s level of compliance with applicable IC laws.

One way that many companies have enhanced their IC compliance is through a process such as IC Diagnostics™, which evaluates a company’s level of compliance and, to the extent feasible, restructures, re-documents, and re-implements the independent contractor relationship, without altering the company’s business model – all in an effort to minimize independent contractor misclassification exposure by means of a customizable and sustainable solution.

Written by Richard Reibstein

Posted in IC Compliance | Leave a comment

Is Your Company on an Independent Contractor Misclassification “Hit List”?

As reported six months ago in an article in the E&P Journal, the oil and gas industry is one of those that is under attack by plaintiffs’ class action lawyers filing independent contractor misclassification lawsuits. My colleagues Bill Swanstrom and Mike Rose joined me then in commenting on some of the more notable lawsuits against energy companies that use independent contractors to perform specialty services in the areas of exploration and production.

While on the lookout for additional IC misclassification cases in the oil and gas industry, we came across a website page for a plaintiffs’ class action law firm that focuses on  several industries and includes “hit lists” of companies as potential defendants in claims alleging independent contractor misclassification.  In the oil and gas industry, the list names more than 130 companies, and the site suggests that workers “may have claims” if they are performing any of the following types of services:  Base Operators, Flow Back Operators, Pipeline Inspectors, Drillers, Field Specialists, Field Engineers, Field Operators, Field Coordinators, and Tool Pushers.

Other industries with “hit lists” on that website page include trucking and transportation, chain restaurants, banking and financial services, and retail sales – each with a list of company names.

This type of advertising by plaintiffs’ class action lawyers is increasingly common.  What can companies do to minimize the risk that they will become a defendant in a class action IC misclassification lawsuit?  After summarizing some of the new cases affecting the oil and gas industry, we provide an in-depth analysis and then discuss on our “Takeaways” some steps that companies in all industries can take not only to maximize compliance with federal and state IC laws but also to reduce the likelihood of becoming a defendant in those types of class actions.

Recent IC Misclassification Cases in the Oil and Gas Industry

While we report below on three recent cases in one industry, these sorts of IC misclassification lawsuits are similar to those affecting companies in almost every other sector of the economy.

OIL AND NATURAL GAS COMPANY AGREES TO PAY OILFIELD WORKERS $2.9 MILLION IN SETTLEMENT OF IC MISCLASSIFICATION CLASS ACTION

Less than two weeks ago, a Pennsylvania federal court granted final approval of a $2.9 million settlement of a class and collective action brought by oilfield workers against Rice Energy, Inc., an oil and natural gas company. The plaintiff, a drilling fluid engineer, provided specialty services in Ohio and Pennsylvania in the Marcellus, Utica, and Upper Devonian Shales for six months beginning in August 2016.  The plaintiff asserted that Rice Energy engaged in violations of the federal Fair Labor Standards Act (FLSA) and state wage and hour laws as a result of its alleged misclassification of him and other oilfield workers as independent contractors and not employees.

According to the complaint, the plaintiff’s primary job duties included monitoring fluid activities at jobsites, operating oilfield equipment, coordinating transfer of fluids between rigs, controlling fluid within defined specifications, and building and maintaining various fluid systems associated with drilling and completion of wells. In support of his misclassification claims, the complaint alleged that: Rice Energy directed the hours and locations where the plaintiff worked, the tools he used, and the rates of pay he received; the plaintiff did not provide his own equipment or incur operating expenses like rent, payroll, marketing, and insurance; no real investment was required of the plaintiff; the plaintiff was economically dependent on the company and was prohibited from working other jobs while working on jobs for the defendant; Rice Energy directly determined the plaintiff’s opportunity for profit and loss; and that very little skill, training, or initiative was required of plaintiff to perform work for the company.

The defendant’s answer denied these allegations and focused on the fact that the plaintiff “independently contracted with Patriot Drilling Fluids, a company with which [Rice Energy] contracted to perform services at well sites.”  The answer also contained more than a dozen defenses, including: the plaintiff and proposed class and collective members were properly classified as independent contractors; they were engaged by a third party, Patriot Drilling Fluids, and not by the defendant; and any alleged damages were the sole responsibility of the third party and not the defendant. The court’s order approving the settlement expressly stated that it “makes no finding or judgment as to the validity of any claims released under the Settlement or whether Rice Energy is liable under the Fair Labor Standards Act or any other applicable law.” Williford v. Rice Energy, Inc., No. 2:17-cv-00945-DSC (W. D. Pa. Dec. 19, 2018).

ENERGY AND PETROCHEMICAL SERVICES COMPANY IS NOT ENTITLED TO SUMMARY JUDGMENT IN IC MISCLASSIFICATION COLLECTIVE ACTION BY CONSULTING “COACHES”, BUT SECURES DE-CERTIFICATION ORDER FROM THE COURT

Two months ago, an Oklahoma federal court denied the summary judgment motion of Check-6, Inc., a company in the business of providing consulting services in the energy, manufacturing, mining, petrochemical and transportation industries brought against it by consulting “coaches” who provided services at the work sites of Check-6’s clients. A collective group of coaches, consisting of the named plaintiff and 18 opt-ins, claimed that they were denied overtime compensation under the FLSA due to their alleged misclassification as independent contractors and not employees.  In its decision, the court stated that the Court of Appeals for the Tenth Circuit has “repeatedly denied summary judgment motions where there remained disputed facts material to the classification of workers as employees or independent contractors.” Applying the six-factor “economic realities” test, the court found that a reasonable trier of fact could find that the facts supported a determination that the coaches were employees and not independent contractors; therefore, the court held, summary judgment must be denied. Specifically, the court found that there was disputed evidence as to four of the six factors: the company’s degree of control over the services performed by the coaches; their opportunity for profit and loss; the coaches’ investment in their individual business; and the permanence of the parties’ working relationship. Goodly v. Check-6, Inc., No. 16-CV-334-GKF-JFJ (N.D. Okla. Oct. 18, 2018).

Although the court denied summary judgment in favor of the company, less than two weeks later the court “de-certified” the class/collective action.  It stated: “[D]ecertification is warranted by individualized issues, which include, but are not limited to, . . . the determination of each plaintiff’s status as an independent contractor or employee.”  With regard to the issue of whether the “coaches” were properly classified as independent contractors, the court utilized the fact-intensive economic realities test and concluded that any such determination would require individualized analysis of each of the opt-in plaintiffs especially because they worked at different Check-6 client sites and had different responsibilities depending on the site. Goodly v. Check-6, Inc., No. 16-CV-334-GKF-JFJ (N. D. Okla. Nov. 1, 2018).

DRILLING/WELL SITE CONSULTANT FILES IC MISCLASSIFICATION CLASS ACTION IN PENNSYLVANIA

This past September, a drilling consultant/well site supervisor filed a proposed class and collective action on behalf of himself and other oil field personnel against EdgeMarc Energy Holdings, LLC, an oil and natural gas company primarily doing business in Pennsylvania, Ohio, and West Virginia. The lawsuit is aimed at recovering unpaid overtime compensation under the FLSA and wage and hour laws of Pennsylvania and Ohio that the plaintiff claims is due because he and the other oil field workers were classified as independent contractors and not employees.

According to the complaint, the workers operate oilfield machinery; perform manual labor and work long hours in the field, and are paid a day-rate with no overtime compensation.  The complaint further alleged, among other things, that the daily activities of the workers were mostly governed by EdgeMarc’s or its clients’ standardized plans, procedures, and checklists; virtually every job function was pre-determined by EdgeMarc or its clients, including what tools to use, what data to compile, the schedule of work and related duties; and the workers were prohibited from varying their job duties outside pre-determined parameters. The plaintiff also alleges that no substantial investment was required of him; that EdgeMarc, or the company with which it contracted, exercised control over all aspects of the plaintiff’s job, including the hours and locations of work, tools used, and rates of pay received; he did not incur operating expenses like rent, payroll, marketing and insurance; he was prohibited from working other jobs for other companies; and his work required little skill, training or initiative.  Larsen v. EdgeMarc Energy Holdings LLC, No. 2:18-cv-01221 (W.D. Pa. Sept. 13, 2018).

Takeaways:  How Companies Can Minimize IC Misclassification Exposure and Maximize Compliance with IC Laws

Regardless of whether your company is on “hit list” created by a plaintiffs’ class action law firm, there are a number of steps you can take to reduce the likelihood of IC misclassification liability and to enhance your compliance with federal and state IC laws.  Here are three:

  1.  Restructuring, re-documenting, and re-implementing your IC relationships

While the U.S. Department of Labor may have dialed down its crackdown on IC misclassification and leveled the playing field under the Trump administration, class action lawyers have increased their focus on these types of lawsuits.

The threshold inquiry by any company using ICs should be whether the workers in question are suitable candidates for payment on a 1099 basis.  Not all workers are.  Although the tests for IC status vary dramatically among the states and there are different tests under various federal statutes, it is not particularly challenging to determine, as an initial matter, whether any particular group of workers might validly qualify as valid ICs.

While most tests for IC status consist of several factors, some as many as 20 or more, there is one factor that is crucial in every test: is the individual directed “how” to perform his or her services? Plainly, every business directs every IC and every employee as to “what” work they are expected to perform.  But unlike employees, who are subject to being told “how” to do their work, the most important factor in determining IC status is whether the service providers decide the manner and means by which they render services, consistent with industry standards and any legal or client requirements.

Even if the workers in question may qualify as valid ICs, companies all too often create their own exposure to IC misclassification if they, or a party they contract with, fail to properly structure, document, and implement their IC relationships in a manner that complies with IC laws.  This is where a comprehensive process, such as IC Diagnostics™, can be effectively deployed, assessing well over 48 factors bearing on workers’ IC status before an IC relationship is established – or, if one already exists, determining how it can be restructured, re-documented, and re-implemented to minimize any IC misclassification exposure.

The tests for IC status have vexed legal practitioners and companies for years, and a great number of the factors bearing on IC status are counter-intuitive.

What can happen to a company that does not structure or document its IC relationships in a manner is found by a court or regulatory agency to be non-compliant? The results can be costly, such as what happened to one of the country’s Fortune 500 companies, FedEx. The wording of its independent contractor agreement covering its Ground Division drivers was held by two federal appellate courts as creating an employment relationship as a matter of law.  As a result, over the past several years, FedEx has chosen to settle several dozen IC misclassification cases for nearly $500 million.

In the Larson v. EdgeMarc Energy case reported above, if the allegations are true that the company prepared standardized plans, procedures, and checklists for the oilfield workers treated as independent contractors, it would be far more challenging for the company to defend the case than if its documentation was free from direction and control.

Solid documentation alone will not always protect a company; it is not uncommon for companies with decent IC agreements to fail to carry out or implement their IC relationships in a way that is consistent with IC laws and their IC agreements.

What is a company to do, whether they are in the oil and gas industry or, for that matter, any other sector of the economy?  There are no shortcuts or “quick fixes” when seeking to enhance IC compliance, and “one size fits all” solutions are likely to be ill-fitting.  Companies that rely on ICs should seek out sustainable solutions that offer state-of-the-art approaches to enhancing IC compliance. While such an approach is more time-intensive, a customized approach is far more likely to effectively minimize IC misclassification exposure, without changing a company’s business model.

  1.  Avoid treating all those classified as independent contractors in the same fashion

In the Goodly v. Check-6 case, the court de-certified the class/collective.  This is likely to require the plaintiff and each of the 18 opt-ins to litigate their cases on an individual basis.  De-certification can sometimes lead to settlement on a far less costly basis. But de-certification can usually only be obtained where there are meaningful differences in treatment or circumstances between the plaintiff and many of the proposed class or collective members. While uniformity and consistency may create efficiencies, businesses that treat some contractors differently can lead to a court to put an end to a class or collective action at the preliminary or final stages of a lawsuit.

  1.  Adding a state-of-the-art arbitration clause to IC agreements

In addition, companies should consider adding to their IC agreements arbitration provisions with class action waivers.  While such provisions are not applicable to governmental agencies conducting audits, investigations, or administrative proceedings, their inclusion in IC agreements has served the interests of many employers.

For example, many of our monthly news updates include cases where companies have successfully compelled individual arbitration in response to the filing of a proposed class action.  For example, in one of those blog posts, we reported that a California federal court had granted Chevron Corporation’s motions to compel arbitration of collective action claims brought by well site/drill site managers who alleged that Chevron had violated the wage and overtime provisions of the FLSA due to alleged misclassification of the managers as independent contractors. Each of the four managers who were the subject of the motion to compel arbitration had entered into arbitration agreements with different consulting firms that provided services to Chevron. In granting the motion to compel arbitration, the court ruled that Chevron was entitled, as a third-party beneficiary, to enforce the arbitration provisions in the managers’ contracts with the consulting companies. Each consultancy agreement contained similar arbitration language: “All claims, disputes or controversies arising out of, in connection with or in relation to this Agreement or the Services, including any and all issues of arbitration of such claim, dispute or controversy…shall be submitted to a mandatory and binding arbitration….”  McQueen v. Chevron Corp., No. C 16-02089 (N.D. Cal. Dec. 18, 2017).

When arbitration agreements are in place, class action lawyers oftentimes take a closer look at whether they wish to invest the time and resources necessary to litigate a class or collective action case.  The lawyers in the Williford v. Rice Energy case, which we summarized above, are located in Texas, but they were retained by a drilling fluid engineer who worked in Pennsylvania and Ohio.  That law firm has a robust internet presence and advertises its services by asking “Have you been misclassified as an independent contractor?”  While those lawyers don’t have a “hit list” of oil and gas companies, they do have a “hit list” of 14 industries they say on their website have “independent contractor issues,” and they list “oil and gas – both service companies and operators,” at the very top.

Other industries listed on that law firm’s independent contractor hit list are: staffing companies; commercial construction; retailers; financial services; home care; IT, software and computer technology; accounting; marijuana products; insurance; entertainment; real estate; delivery services and short-haul transportation; and telemarketing.

If the third-party contractor that had contracted with Rice Energy had included a Chevron-type arbitration clause with a class action waiver in its IC agreement with its independent contractors, the lawyers engaged by Williford may have chosen not to accept the case.  Or, even if they chose to pursue the matter, Check-6 may have been able to accomplish what Chevron did – compel arbitration and forestall the class action lawsuit.

Of course, it is imperative that an arbitration clause with a class action waiver be well drafted and anticipate the types of arguments that plaintiffs’ class action lawyer typically raise in response to a motion to compel arbitration – as we pointed out in our blog post entitled “How to Effectively Draft Arbitration Clauses With Class Action Waivers in Independent Contractor Agreements.”

Ideally, companies that make use of ICs in the oil and gas industry – and in virtually every other industry – will consider adopting all three of the above steps to minimize class action IC misclassification lawsuits while enhancing their compliance with IC laws.

Written by Richard Reibstein

Posted in IC Compliance

December 2018 Independent Contractor Misclassification and Compliance News Update

There were only a handful of independent contractor misclassification cases of significance in December and each of those matters relates to the subject of prior comprehensive posts on this blog.

The first involved FedEx Ground, which has paid hundreds of millions of dollars to settle dozens of class action lawsuits across the country and to resolve misclassification claims brought against the company by various state Attorney Generals. In the FedEx case reported below , the company settled an IC misclassification case brought by the New York Attorney General for a seven-figure amount, with the proceeds being disbursed principally to the drivers.

As we have previously reported, FedEx has settled almost all of its lawsuits as a result of a holding by the U.S. Court of Appeals for the Ninth Circuit concluding that, as a matter of law, the company had misclassified its Ground Division drivers as independent contractors. The Ninth Circuit decision was followed soon thereafter by a similar decision of the U.S. Court of Appeals for the Seventh Circuit, finding that FedEx’s “control and micromanaging” of the drivers emanated in large part from the IC agreement it had drafted for the drivers to sign.  In those blog posts, we noted that while the FedEx IC agreements were drafted in a manner that closely resembles the way in which good corporate and employment agreements are drafted, that type of drafting can be a company’s worst enemy in the counter-intuitive world of IC compliance, which is one of the lessons other businesses can learn from FedEx’s experience.

Another one of the cases we report on below involved the subject of another blog post of ours entitled, “Oil & Gas Industry Is Next Target for Independent Contractor Misclassification Lawsuits.”  Since we published that post in May 2018, we have reported on a number of additional class actions affecting this industry, and we summarize below yet another oilfield case involving a costly settlement of an IC misclassification class action.

Two of the cases reported below relate to a third subject we have discussed in prior blog posts:  the increasingly important strategy of using arbitration agreements with class action waivers for independent contractors. As we noted only last month in a blog post entitled, “How to Effectively Draft Arbitration Clauses with Class Action Waivers in Independent Contractor Agreements,” companies that utilize these types of contractual provisions can minimize the likelihood of class and collective actions being filed against them for IC misclassification – provided the agreements are drafted in a state-of-the-art fashion.

In the Courts (4 cases)

FED EX TO PAY $2.1 MILLION TO NEW YORK AND GROUND DIVISION DRIVERS IN IC MISCLASSIFICATION ENFORCEMENT PROCEEDING. The New York Attorney General and FedEx Ground Package System, Inc. have reached a  $2.1 million settlement after an eight-year long lawsuit by the Attorney General claiming that FedEx had misclassified hundreds of package delivery drivers in New York as independent contractors, allegedly in violation of various New York labor and wage and hour laws. The Attorney General’s complaint alleged that as a result of the drivers’ misclassification by FedEx, the company made improper deductions from their wages; failed to provide “spread of hours” pay ; did not comply with recordkeeping and wage statement requirements; failed to pay overtime compensation to certain drivers; and engaged in fraudulent business activity. The company did not admit liability and no longer uses the same business model or IC agreement it used eight years ago.  State of New York v. FedEx Ground Package Inc., No. 402960/2010 (Sup. Ct. N.Y. County Dec. 19, 2018).

OIL AND NATURAL GAS COMPANY AGREES TO PAY OILFIELD WORKERS $2.9 MILLION IN SETTLEMENT OF IC MISCLASSIFICATION CLASS ACTION.   A Pennsylvania federal court has granted final approval of a $2.9 million settlement of a class and collective action brought by oilfield workers against Rice Energy, Inc., an oil and natural gas company. The plaintiff, a drilling fluid engineer, asserted that Rice Energy engaged in violations of federal and state wage and hour laws as a result of its alleged misclassification of plaintiff and other oilfield workers as independent contractors and not employees. According to the complaint, the plaintiff’s primary job duties included monitoring fluid activities at jobsites, operating oilfield equipment, coordinating transfer of fluids between rigs, controlling fluid within defined specifications, and building and maintaining various fluid systems associated with drilling and completion of wells. In support of the misclassification claims, the complaint alleged that: Rice Energy directed the hours and locations where the plaintiff worked, the tools he used, and the rates of pay he received; the plaintiff did not provide his own equipment or incur operating expenses like rent, payroll, marketing, and insurance; no real investment was required of the plaintiff; the plaintiff was economically dependent on the company and was prohibited from working other jobs while working on jobs for the defendant; Rice Energy directly determined the plaintiff’s opportunity for profit and loss; and that very little skill, training, or initiative was required of plaintiff to perform  work for the company.

The defendant’s answer denied these allegations and focused on the fact that the plaintiff  “independently contracted with Patriot Drilling Fluids, a company with which [Rice Energy] contracted to perform services at well sites.”  The answer also contained more than a dozen defenses, including : the plaintiff and proposed class and collective members were properly classified as independent contractors; they were engaged by a third party, Patriot Drilling Fluids, and not by the defendant; and any alleged damages were the sole responsibility of the third party and not the defendant. The court’s order approving the settlement expressly stated that it “makes no finding or judgment as to the validity of any claims released under the Settlement or whether Rice Energy is liable under the Fair Labor Standards Act or any other applicable law.” Williford  v. Rice Energy, Inc., No. 2:17-cv-00945-DSC (W. D. Pa. Dec. 19, 2018).

“CLICKWRAP” AGREEMENTS CONTAINING ARBITRATION PROVISIONS UPHELD IN TWO INDEPENDENT CONTRACTOR MISCLASSIFICATION LAWSUITS.  Federal courts in California and Massachusetts have compelled arbitration in two independent contractor misclassification lawsuits, holding that the company’s use of online “clickwrap” or “click-through”  arbitration agreements was binding and enforceable. While online agreements of this sort appear in various forms, they typically require a user to click either “Agree” or “Dismiss” or select from similar options abefore the user may proceed to the next screen.

In California, Postmates Inc., an on-demand delivery service that offers clients delivery from restaurants and stores by couriers engaged by Postmates to make the requested deliveries, faced a proposed class action alleging violations of wage and hour laws as a result of allegedly misclassifying couriers as ICs.   Postmates uses a “click-through process” in which prospective couriers are presented, during the process of signing up to make deliveries for Postmates, with a hyperlink to an independent contractor agreement containing an arbitration provision.  When they click on the link to proceed, the text of the agreement is displayed; and then they click either “Agree” or “Dismiss” before moving to the next step. Postmates made a motion to compel arbitration of the plaintiff’s claims, arguing that the plaintiff clicked “Agree.” The plaintiff argued that the arbitration provision in the IC agreement was not reasonably conspicuous because it was allegedly “buried deep within the contract,” and that the transportation worker exception to the Federal Arbitration Act applied and thereby precluded arbitration because the meals and goods the couriers delivered originated across state lines.

The court granted the motion to compel arbitration, holding that the plaintiff had assented to Postmates’ independent contractor agreement and its arbitration clause by executing Postmates’ “click-through” agreement. In compelling arbitration, the court concluded that the plaintiff was presented with the text of the arbitration agreement before clicking “Agree;” that she had the opportunity to opt out but did not choose to do so, and that contrary to plaintiff’s assertion that the arbitration clause was inconspicuous, the arbitration provision was actually referred to on the first page of the agreement and Postmates encouraged viewers to review that section carefully. The court also rejected the plaintiff’s argument that the transportation worker exception applied, finding that Postmates’ couriers did not engage in interstate commerce. Lee v. Postmates Inc., No. 18-cv-03421 (N. D. Cal. Dec. 18, 2018).

A Massachusetts federal court faced a similar issue in a proposed independent contractor  misclassification class action brought against on-demand ride-sharing platform, Lyft, Inc., by a driver seeking unpaid minimum wage and overtime compensation.  Lyft made a motion to compel arbitration based on the driver having clicked a checkbox when he enrolled as a driver with Lyft that stated, “I agree to Lyft’s [September 30, 2016] terms of services.” The words “Lyft’s terms of services’ were highlighted in pink and hyperlinked to the written terms. Among other provisions, the terms provided in capital letters that drivers must “SUBMIT CLAIMS…AGAINST LYFT TO BINDING AND FINAL ARBITRATION ON AN INDIVIDUAL BASIS, NOT AS A PLAINTIFF OR CLASS MEMBER IN ANY CLASS, GROUP OR REPRESENTATIVE ACTION OR PROCEEDING.” The driver reaffirmed acceptance of a nearly identical arbitration provision in early May 2018.  A few weeks later the driver sought to opt out of the arbitration clause, arguing that the agreement to arbitrate was invalid because the terms were not reasonably communicated.  The driver claimed that the terms appeared three-quarters of the way down on a computer screen that offers no contextual clue that he was entering into a binding contract.  He also argued that the terms were buried amid a multi-screen sign-up process; they were written in the smallest font on the page; and the hyperlinked text was not italicized, bolded, underlined or in classic blue coloring to indicate that it is a hyperlink.

The court rejected the driver’s arguments, stating: “These online agreements – where a user selects “I agree” without necessarily reviewing the contract – are typically called “clickwrap” agreements, and are generally held enforceable.” The court explained that Lyft’s screen required the driver to click that he agreed to the terms of services before he could continue with the registration process and noted that although the terms were towards the bottom of the page in small font, the operative phrase was in pink and distinguishable on the screen. Regarding the driver’s claim that he had opted out of the arbitration agreement, the court held that the driver’s opt out was effective only as to the revisions the company made to the September 30, 2016 arbitration provisions, which the court viewed as “immaterial.”  Wickberg v. Lyft, Inc., No. 1:18-cv-12094-RGS (D. Mass. Dec. 19, 2018) .

Regulatory Initiatives (1 case)

RADIO TALK SHOW HOSTS BY OREGON LABOR AGENCY FOUND TO BE MISCLASSIFIED AS INDEPENDENT CONTRACTORS.  The Oregon Bureau of Labor and Industries (BOLI) announced in a News Release that Pamplin Broadcasting-Oregon, a local media group, was required to pay more than $55,000 to two radio talk show hosts for violations of the overtime pay and recordkeeping requirements of Oregon law. BOLI found that all on-air content was discussed and agreed upon by the show’s producer as well as the show’s hosts; the hosts were required to attend staff meetings and were told to be evenhanded when discussing political issues; the company made the vast majority of investments (studio equipment, office supplies) needed for the hosts to provide radio show hosting services; the amount that the hosts were paid per show was non-negotiable; the company created the show’s logo and each “opening” for the show; the hosts had an exclusive relationship with the company; the hosts’ initiatives could not be used to generate greater income from the company; and the hosts believed they would be permanently replacing a previous radio show hosted by others. BOLI applied a six-part economic realities test to determine the independent contractor/employee status of the two hosts, concluding that the facts “lean in favor of an employment relationship due to the structure, framework and guidance provided by Pamplin management.”

Written by Richard Reibstein

Compiled by Janet Barsky

Your comments are invited.

To receive blog posts and regular monthly IC Compliance News reports, you may subscribe by e-mail or RSS to the Independent Contractor Compliance and Misclassification Legal Blog.

INVITATION TO UPLOAD CONTENT: Readers may contribute to this repository of newsworthy matters by sending an e-mail to the publisher (through the About the Publisher page on this blog) with any recent:

  • court cases commenced;
  • developments or updates in existing court cases, including any judicial decisions;
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Posted in IC Compliance

November 2018 Independent Contractor Misclassification and Compliance News Update  

While there were no headline-grabbing cases or developments in the area of independent contractor misclassification and compliance during the past month, the first four court decisions reported below provide the basis for two useful strategies for companies to consider when using an independent contractor business model or supplementing their workforces with 1099ers.

A large percentage of plaintiffs who bring proposed class and collective actions for IC misclassifications are successful in obtaining conditional class certification because of the relatively modest standard applied by many courts across the country at that stage of a lawsuit.  As noted in two cases below – one dealing with a moving company and the other involving an energy services business – the class representative only had to make a “modest factual showing” to obtain conditional certification.  Once conditional certification is granted, plaintiff’s counsel can in most instances proceed with a full array of discovery devices addressing the merits of the dispute and involving dozens of depositions and thousands of documents. The costs of defending the case then elevate dramatically.  Sometimes those costs become so overwhelming that many businesses feel they have little choice but to settle, even when they believe they would succeed on the merits if the case proceeded to trial.

A few companies, however, proceed through a costly discovery process after which they attempt to persuade the court to decertify the class or collective action. At that stage of the proceedings, however, most courts apply a far stricter standard to maintain the case as a class or collective action than the test used at the conditional certification stage. As shown in the energy services company case described below, because the test for independent contractor status is fact intensive and  required the court to make an individualized analysis of the facts pertaining to each class or collective member’s status as either an IC or an employee, the court decertified the collective action. That accomplishment, though, is typically accompanied by a significant expenditure of legal fees and management time and resources.

How can companies avoid or minimize the likelihood of a class or collective action alleging IC misclassification?  This can be accomplished in a two-step strategic approach.  First, include an effective arbitration clause with a class action waiver provision in your independent contractor agreements.  See the discussion of this topic in our recent blog post.  Second, elevate your company’s level of independent contractor compliance as we discuss in our White Paper, so that there is less likelihood that plaintiffs’ class action lawyers would wish to “invest” their time and effort in an IC misclassification legal challenge that is less likely to succeed.

In the Courts (6 cases)

MOVING COMPANY UNABLE TO DEFEAT CONDITIONAL CERTIFICATION OF IC MISCLASSIFICATION IN CLASS ACTION LAWSUIT BY MOVING SERVICE CREW MEMBERS.  A New York federal court has granted conditional certification of an FLSA and New York Labor Law collective and class action brought by a moving service crew member against Flat Rate Movers, Ltd.  In reaching its decision, the court concluded that the named plaintiff representative crew member had made the necessary “modest factual showing” that he and prospective collective action members “were victims of a common policy or plan that [allegedly] violated the law,” i.e. due to their classification as ICs, the company allegedly had did not paid the operators minimum wages and overtime compensation, did not keep records of time worked and had never provided the crew members with any tip credit notice or pay stubs. Additionally, the court found that the plaintiff crew member had demonstrated he and the other crew members were “similarly situated with respect to their job requirements” because they were required to purchase and wear the company’s uniform; often worked 14-hour days or more, six days per week; and were subject to the company’s control over  tips they received and whether they would pack a customer’s belongings in addition to moving them. The court also stated that at this preliminary stage, it was premature to make any merits determination regarding the company’s argument that the crew members were independent contractors, not employees.  Djurdjevich v. Flat Rate Movers, Ltd., No. 17-CV-261 (AJN) (S.D.N.Y. Nov. 13, 2018).

ENERGY CONSULTANTS’ COLLECTIVE ACTION FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION IS “DECERTIFIED” BY OKLAHOMA FEDERAL COURT.  Energy and petrochemical services company, Check-6, Inc., succeeded in obtaining an order from an Oklahoma federal district court decertifying a collective action by consulting “coaches” who provided services at the work sites of Check-6 clients. Check-6, which provides consulting services in the energy, manufacturing, mining, petrochemical, and transportation industries, argued that the coaches are not similarly situated and therefore it would not be appropriate to proceed to trial collectively on the claims of those who had opted into the case.  A group of coaches consisting of the named plaintiff and 18 opt-ins claimed that they were denied overtime compensation under the FLSA due to their alleged misclassification as independent contractors, not employees. Earlier, four of the opt-ins had been excluded by the court because they fell within the FLSA’s foreign workplace exemption, which excludes from FLSA coverage any employee whose services during the workweek are performed in a workplace within a foreign country.

The court had granted conditional certification of the class, but following discovery, the court applied a more rigorous standard to determine whether the opt-ins were “similarly situated” to the lead plaintiff and each other.  In applying that key test, the court considered the factual and employment settings of each plaintiff, the various defenses available to the company, and fairness and procedural considerations. Applying those standards, the court concluded that the coaches were not similarly situated and that, “decertification is warranted by individualized issues, which include, but are not limited to, the application of the foreign workplace exemption . . . and the determination of each plaintiff’s status as an independent contractor or employee.”  With regard to the issue of whether the “coaches” were properly classified as independent contractors, the court utilized the fact-intensive economic realities test and concluded that any such determination would require individualized analysis of each of the opt-in plaintiffs especially because they worked at different Check-6 client sites and had different responsibilities depending on the site. Goodly v. Check-6, Inc., No. 16-CV-334-GKF-JFJ (N. D. Okla. Nov. 1, 2018).

NFL SUCCEEDS IN COMPELLING ARBITRATION OF SECURITY REPRESENTATIVES’ CLASS ACTION ALLEGING IC MISCLASSIFICATION. The National Football League successfully obtained an order granting its motion to compel arbitration of claims by nine former security representatives alleging violations of the Employee Retirement Income Security Act, the FLSA, the Age Discrimination in Employment Act, and various other New York state laws, based on the NFL’s alleged misclassification of the plaintiffs as independent contractors and not employees. The complaint, filed in federal court in New York, alleged that the security representatives each worked for the NFL between 12 and 26 years; were required to participate in training sessions; did not have autonomy in the means and methods of providing their services; were required to follow the NFL’s dress code and use NFL ID cards; were mandated to follow an NFL Operations Manual; and had to be on-call at all times, day or night.

Each of the plaintiffs provided services under Security Representative Agreements which classified them as independent contractors and provided for compulsory arbitration of all disputes between the parties. The court rejected the security representatives’ argument that they were fraudulently induced to sign the agreements based on the NFL’s knowingly false representation that they were independent contractors and not employees. Instead, the court determined that the plaintiffs’ claims were arbitrable because each of the parties had agreed to arbitrate and the scope of the agreements encompassed the claims at issue. Three of the nine plaintiffs also argued they were not bound by the arbitration provisions of the agreements because they did not sign them in their personal capacities but rather as the president or owner of an entity. The court rejected their argument, holding that a party who receives a direct benefit from a contract containing an arbitration clause is estopped from denying its obligation to arbitrate.  Here, the direct benefit the representatives received was the compensation for their services provided for in the agreement. Additionally, in finding the arbitration clause to be enforceable, the court stated that contrary to the plaintiffs’ arguments, the arbitration clause did not prevent them from vindicating their statutory rights and pursuing equitable remedies, including reinstatement. Likewise, the arbitration clause did not prevent the plaintiffs from accessing the legal fee-shifting provisions of statutes like the FLSA and ADEA. Buckley v. National Football League, No. 18 civ. 3309 (LGS) (S.D.N.Y. Nov. 16, 2018).

RIDE-SHARING COMPANY SUCCEEDS IN COMPELLING ARBITRATION OF CLASS ACTION FOR VIOLATION OF FEDERAL BACKGROUND CHECK LAW BY DRIVERS CLASSIFIED AS IC’S.  A California federal court has granted Lyft’s motion to compel arbitration of a prospective driver’s claim in a proposed class action based on the ride-sharing company’s alleged violation of the Fair Credit Reporting Act. According to the court’s determination, Lyft twice denied the driver’s applications to be a driver based on a “consumer report” that a screening company provided to Lyft regarding the driver. The plaintiff asserted that Lyft violated the FCRA by failing to provide him with a copy of the report and a written description of his rights before it took adverse action based on the report. The plaintiff had accepted electronically  “Terms of Service” that included a provision requiring him to arbitrate all disputes and legal claims. The court found that (1) the parties entered into a binding agreement containing the arbitration requirement, (2) the parties in their agreement had delegated questions about the arbitrability of disputes – such as whether [the plaintiff’s] FCRA claim falls within the scope of the arbitration provision – to the arbitrator, and (3) the arbitration provision is enforceable and not unconscionable.  Peterson v. Lyft, Inc., No. 16-cv-07343-LB (N. D. Cal. Nov. 19, 2018).

REAL ESTATE MANAGEMENT COMPANY UNABLE TO DISMISS TITLE VII LAWSUIT BY PROPERTY MANAGER IT TREATED AS AN INDEPENDENT CONTRACTOR. A former property manager classified as an independent contractor by a real estate management company may proceed with her Title VII sex discrimination, hostile work environment, and retaliation lawsuit against Gold Crown Management LLC, according to a recent ruling by a Missouri federal court. The company had made a motion to dismiss the lawsuit, arguing the plaintiff was not covered by Title VII because she was an independent contractor, not an employee.  The company referred the court to her EEOC charge, where she identified herself as a “Leasing Consultant” and stated that she was paid “as a contractor.” The court rejected the company’s argument and found that the plaintiff adequately alleged that the company was her employer in her original and amended complaint, her EEOC charge, and related documents. The court concluded that the plaintiff’s statement that she was “paid as a consultant” was not fatal to her claims because she “attached documents to her Amended Complaint suggesting the location, hours and hourly rate of her employment were set by [the Company].”  The court stated: “While Plaintiff referred to herself as a ‘contractor’ or ‘consultant’ in other places, the nature of Plaintiff’s employment cannot be decided on a motion to dismiss given the fact-intensive nature of the inquiry [into independent contractor/employee status].”  Teegarden v. Gold Crown Mgmt., LLC, No. 4:18-cv-00554-SRB (W. D. Mo. Nov. 5, 2018).

U.S. JUSTICE DEPARTMENT UNABLE TO DISMISS CLAIM IT WAS JOINT EMPLOYER OF DENTAL HYGIENIST WORKING AT FEDERAL PRISON WHO WAS CLASSIFIED AS AN IC BY A GOVERNMENT CONTRACTOR.  A Missouri federal court denied the Department of Justice’s motions to dismiss and for summary judgment in an employment discrimination lawsuit filed by a part-time dental hygienist at the U.S. Medical Center for Federal Prisoners.  The hygienist alleged she was jointly employed by the DOJ and the government contractor that had classified her as an independent contractor. The plaintiff asserted that while working in the prison, she was harassed and retaliated against based on her gender, sexual orientation, age, and religion in violation of Title VII of the Civil Rights Act and the Age Discrimination in Employment Act. The DOJ contended that the hygienist was not a federal employee but rather an independent contractor ineligible to recover under the federal anti-discrimination laws.  Although certain factors favored independent contractor status, the court concluded that a number of other factors supported employee status, including evidence that the DOJ controlled the manner and means of her services, provided the tools for her job, and controlled the hygienist’s work schedule.  It also emphasized that she had worked at the same facility for six years and that the DOJ supervised her day-to-day duties, oversaw and reviewed her patient care abilities and performance, and scheduled her patient appointments. Tipton v. Sessions, No. 6:17-03179-CV-RK (W. D. Mo. Nov. 13, 2018).

Administrative and Regulatory Developments

U.S. LABOR DEPARTMENT ISSUES QUARTER MILLION DOLLAR ASSESSMENT AGAINST ELECTRICAL CONTRACTOR FOR IC MISCLASSIFICATION.  An electrical contracting company, Ernest P. Breaux Electrical LLC, has been assessed $249,278 by the U.S. Department of Labor for allegedly misclassifying workers as independent contractors and not employees. Following an investigation by the Labor Department’s Wage and Hour Division in Louisiana, the company was ordered to pay the assessed amount to 117 employees for allegedly violating the FLSA’s overtime and recordkeeping requirements due to their misclassification as independent contractors. In a press release issued on November 28, 2018, WHD District Director Troy Mouton stated: “Employers in the construction industry must pay their employees the wages they have legally earned. We want to help employers in construction, and in all industries, learn what federal labor laws require so that employees are paid what they have legally earned, and employers can avoid violations and compete on a level playing field.”

Written by Richard Reibstein

Compiled by Janet Barsky

Your comments are invited.

To receive blog posts and regular monthly IC Compliance News reports, you may subscribe by e-mail or RSS to the Independent Contractor Compliance and Misclassification Legal Blog.

INVITATION TO UPLOAD CONTENT: Readers may contribute to this repository of newsworthy matters by sending an e-mail to the publisher (through the About the Publisher page on this blog) with any recent:

  • court cases commenced;
  • developments or updates in existing court cases, including any judicial decisions;
  • legislative bills proposed or enacted;
  • regulatory or administrative actions, including enforcement initiatives and task force developments; and

other newsworthy matters, such as newspaper articles, white papers, and government press releases and reports.

Posted in IC Compliance

How to Effectively Draft Arbitration Clauses with Class Action Waivers in Independent Contractor Agreements

This blog post is based on an article published in the Daily Labor Report (November 9, 2018). It is reproduced with permission from Daily Labor Report Copyright 2018 by The Bloomberg Bureau of National Affairs, Inc. (800.372.1033) www.bna.com.

Even before the U.S. Supreme Court’s decision last May in Epic Systems Corp., which upheld mandatory arbitration agreements, courts have been busy enforcing or striking down arbitration provisions. Many of those decisions were not based primarily on the law but rather on the language in the arbitration agreement drafted by the company. A well drafted arbitration clause with class action waiver will generally mean, with few exceptions, that a class or collective action cannot be maintained and that each plaintiff’s and class member’s case must be individually litigated. A poorly drafted one will result in the company having to defend itself in a class action because the language deployed by the business did not take full advantage of the current state of the law. Some arbitration provisions drafted by businesses can even needlessly impose contractual obligations or undesirable state laws upon the company.

Plaintiffs’ class action lawyers regularly challenge arbitration clauses with class action waivers; they regard them as a huge impediment to their ability to vindicate worker rights including claims asserted by workers who allege they have been misclassified as independent contractors. In contrast, businesses using arbitration agreements view them as a means to curtail the misuse of class actions used to exact costly settlements in circumstances where only a few members of the class truly feel aggrieved.

Whether an arbitration agreement in an independent contractor or employment setting will bar a class action depends as much of the wording in the arbitration clause as the applicable law, which is in flux and continues to evolve. That reality strongly suggests that existing arbitration clauses used in independent contractor agreements should be reexamined and updated periodically in tandem with the company’s effort to enhance its compliance with laws governing the use of independent contractors.

Three recent cases provide insights into how companies can create good arbitration clauses in independent contractor agreements.

Berryman v. Newalta Environmental Services, Inc.

Berryman, a solids control technician, was referred by a staffing company, Smith Management and Consulting LLC, to its client Newalta, a company in the oil and gas industry, to provide technical services. The technician filed a proposed class action lawsuit against Newalta Environmental, claiming that Newalta misclassified him and other similarly situated workers as independent contractors and failed to pay them overtime in violation of the federal Fair Labor Standards Act and the Pennsylvania Minimum Wage Act. Newalta filed a motion to compel arbitration based on the arbitration clause in the agreement between Smith Management and Berryman—an agreement to which Newalta was not a party.

A federal court judge in Pennsylvania was presented with the question of whether the language in that contract not only provided for arbitration of all covered disputes between Berryman and Smith Management, but also whether such disputes brought by Berryman against clients of Smith Management, including Newalta, were subject to the arbitration clause in the Smith Management/Berryman contract.

In its decision dated November 1, 2018, the court began its lengthy analysis by noting that the law of Texas, not Pennsylvania, applied, because that was the choice of law provision in the independent contractor contract signed by Berryman with Smith Management. The judge noted that under Texas law, there is a presumption against conferring third-party beneficiary status on non-contracting parties such as Newalta. The court further noted that Texas law requires a court to review the entire contract to determine if an arbitration clause confers third party beneficiary status upon a client of Smith Management. The court held that Newalta was a third-party beneficiary of the arbitration provision because of the language in the contract between Berryman and Smith Consulting that stated: “Arbitration shall apply to any and all Covered Claims, whether asserted by Contractor [Berryman] against the Company [Smith Consulting] and/or . . . any Company Client.” No. 18-cv-793 (W.D. Pa. Nov. 1, 2018) (emphasis added).

What can a company learn from the court’s decision in Berryman? Make sure the arbitration clause specifically designates as third-party beneficiaries all of the clients and customers of the business.

If that had been the case in Newalta, there would have been little or no issue that the client/customer, Newalta, would have been able to make use of the arbitration clause as well, all but eliminating the risk of an adverse decision under state law court as to whether the presumption against third party beneficiary status could be overcome. Thus, for staffing and referral companies as well as businesses that engage independent contractors to provide services to key customers, the larger lesson from Berryman is simple: ensure your independent contractor agreements are updated and enhanced to benefit your customers and clients as well as yourselves.

In addition, third party beneficiary language in arbitration agreements (as well as employment agreements) can and should also cover other possible defendants as well as customers and clients.

Lamps Plus Inc. v. Varela

The U.S. Supreme Court heard oral argument in late October 2018 in this case, which presented the Court with the issue of whether class arbitration is permitted when the parties’ agreement contains an arbitration clause which is silent as to whether the parties authorized the arbitrator to conduct a class arbitration. The U.S. Court of Appeals for the Ninth Circuit had concluded that because of the absence of any language in the agreement pertaining to class arbitration, the contract was ambiguous, and under California contract interpretation principles, any ambiguities should be construed against the drafter of the agreement, which was Lamps Plus, the party seeking to avoid class arbitration.

One of the Justices’ remarks during oral argument was of particular note. Justice Ginsburg questioned the value of a ruling in favor of the plaintiff seeking class arbitration. She projected that if the Court rules in favor of the plaintiff and orders class arbitration in the case, lawyers across the U.S. will simply add a provision in arbitration agreements that class arbitrations are not authorized by the parties. Justice Ginsburg asked the following rhetorical question of the plaintiff’s lawyer: “So, if let’s say you’re right, we’re not doing very much, are we, because contracts will specifically say that class action [arbitration] is waived?” No. 17-988 (Oct. 29, 2018).

What lesson can we learn from Lamps Plus? Any arbitration agreement with a class action waiver should specifically recite that the arbitrator is not given authority to conduct class arbitration. If a company’s arbitration agreement does not already include that language, it should certainly be included in future versions.

Portillo v. National Freight Inc.

A New Jersey federal district court was presented this past June with the question of what state’s law applied in an independent contractor misclassification class action brought by truckers against a logistics/transportation company, National Freight, Inc. (NFI). The plaintiffs, truckers from Pennsylvania and Rhode Island, made deliveries to Trader Joe’s stores throughout many East Coast states on behalf of NFI and claimed that NFI was liable for statutory wage/hour violations, unjust enrichment, and payment of their expenses as a result of allegedly being misclassified as independent contractors. The plaintiffs initially sued under Massachusetts law, but sought to amend their claims to be governed by New Jersey law, which was the choice of law cited in the parties’ contracts. The defendants objected to the motion to amend, even though NFI selected New Jersey law in the contracts it had drafted and tendered to the truckers to sign, and urged the court to apply Pennsylvania law, which contains a more favorable test for independent contractor status than the standard in New Jersey.

The court examined the language contained in the Independent Contractor Operating Agreement and the Lessor and Lease Operating Agreement entered between the parties. The judge noted that the agreements had a choice-of-law provision designating New Jersey as the relevant and applicable body of law. The court then undertook a further analysis using “the most significant relationship” test and determined that New Jersey law did, in fact, apply to the claims brought by the truckers against NFI. The court found conflicting factors supporting usage of Pennsylvania law, which NFI favored, and New Jersey law, which the truckers favored. In reaching its conclusion, the court placed emphasis on the fact that NFI was the more sophisticated party and had drafted the contracts in which NFI elected to be bound by Jersey law, at least with regard to contract claims. No. 15-cv-7908 (D.N.J. June 11, 2018).

Businesses that use independent contractors can learn a lot from the National Freight case: avoid selecting a particular state’s law as the parties’ contractual “choice of law” if that state’s law contains an unfavorable test for independent contractor status. A few states’ independent contractor laws are particularly “employee friendly”; thus, a company’s choice of law selection in an independent contractor agreement should generally steer clear of those states. New Jersey is one such state. Its law became tilted toward employee status only in 2015, when the New Jersey Supreme Court issued its decision in Hargrove v. Sleepy’s, LLC, as we noted in our blog post analyzing that decision.

National Freight also teaches businesses that have had independent contractor agreements in place for many years to keep tabs on changing laws and to modify any choice of law provision in such agreements when there has been an unfavorable change in the independent contractor laws of the state selected as the choice of law.

In addition, the National Freight decision raises the question, why didn’t NFI have an arbitration clause with class action waiver in its independent contractor agreement with the truckers? Had it included such a provision, the case may well have been litigated in arbitration on an individual trucker basis and not in court as a class action.

So, what state law should businesses select in their arbitration agreements? That is a challenging question. Some state laws are less favorable toward independent contractor status than others; those should generally be avoided. In any event, plaintiffs’ class action lawyers generally argue that a choice of law provision cannot override the law of the state of residence of the worker classified as an independent contractor or the law where the worker provided services under the independent contractor agreement.

Additional Pointers in Drafting Effective Arbitration Provisions in Independent Contractor Agreements

There are dozens of other tips that can be used in creating an effective arbitration clause with a class and collective action waiver. Here are some more that will dramatically improve the enforceability and effectiveness of such provisions in independent contractor agreements – as well as freestanding arbitration agreements in the employment context.

  • Make sure the arbitration clauses can withstand unconscionability arguments.

Plaintiffs’ class action lawyers in independent contractor misclassification and employment cases not only routinely challenge the language of arbitration agreements with class action waivers but also frequently argue that certain types of arbitration provisions are unconscionable under applicable state law.

Unconscionability arguments can derive from the high arbitrator fees imposed upon the workers treated as independent contractors, the inconvenience of a forum selection clause that designates a distant location where all disputes are to be resolved, a limitation on statutory or common law remedies, restrictions on discovery, and a host of other provisions in arbitration clauses that are overly favorable to companies.

For example, only last week an appellate court ruled that an arbitration agreement was unconscionable under state law where it required the claimant to pay half of the costs of arbitration, included a limitation on relief, and contained an overly broad confidentiality provision that may impair the claimant’s ability to interview witnesses outside of the formal discovery process. Ramos v. Superior Court of San Francisco County, No. A153390 (Cal. Ct. of App. Nov. 2, 2018).

  • Don’t bury arbitration clauses deep within independent contractor agreements.

Class action lawyers also argue that some arbitration provisions are non-consensual where employers “bury” arbitration provisions deep within independent contractor agreements without informing the worker that the agreement contains a section providing for arbitration of certain disputes.

  • Place jury trial waivers in all capital letters, or bold type, or larger size typeface, and to state that the arbitration clause means that disputes will not be decided by a court or jury.

Some state laws or judicial decisions require waivers of jury trials to be conspicuous. But even if there is no such law or court case in a particular state, conspicuousness of a jury trial waiver is generally regarded as a best practice.

  • Draft a state-of-the-art “delegation” of authority clause.

The so-called “delegation” clause, which delegates authority to arbitrators to decide certain issues, has been the subject of considerable litigation recently. Certain disputes regarding the scope, application, or enforceability of an arbitration clause or the class action waiver itself will be decided by a court absent a delegation clause that direct such matters to be decided by an arbitrator.

  • Ensure your arbitration provisions are up to date, taking into account the newest court cases in this area of the law.

A review of court cases over the past six months indicates that plaintiffs’ class action lawyers are becoming more creative in their efforts to try to circumvent arbitration agreements with class action waivers. Oftentimes, the arbitration provisions were drafted several years ago and are no longer state-of-the-art.

The law in this specialized legal field has changed, and likely will continue to evolve. Businesses need to continually keep tabs on new case developments. Don’t rest on arbitration agreements drafted years ago; instead, companies should modify their arbitration agreements to avoid legal pitfalls that could result in a class action remaining in court.

  • Try to keep abreast of new laws affecting arbitration of wage and hour disputes.

For example, one or more state legislatures have proposed bills similar to California’s Private Attorneys General Act (PAGA), which has been held to be immune from arbitration agreements. Keep an eye out not only for new judicial decisions and trends, but also for new legislative developments.

A Final Key IC Compliance Takeaway

Businesses that use independent contractors should not regard arbitration clauses with class and collective action waivers as a panacea or protection from IC misclassification exposure. Such clauses can only protect against a claim being asserted as a class or collective action (assuming the arbitration agreement is properly drafted). They don’t provide a defense on the merits of a claim that workers were improperly classified as independent contractors and are allegedly owed overtime, minimum wages, employee benefits, expense reimbursements, or other workplace benefits available to employees.

Further, arbitration agreements with class action waivers are not binding on governmental regulators; therefore, they are wholly ineffective at forestalling federal and state regulatory agencies from conducting audits or initiating and maintaining enforcement proceedings under employment and independent contractor laws. The importance of enhancing compliance with employment and independent contractor laws – and not relying simply on an arbitration clause with a class action waiver – cannot be overstated.

More and more companies have sought to enhance their compliance with independent contractor laws through a process such as IC Diagnostics™. This type of process evaluates a company’s level of compliance and, to the extent feasible, restructures, re-documents, and re-implements the independent contractor relationship, without altering the business model – all in an effort to minimize independent contractor misclassification exposure by means of a customizable and sustainable solution.

Written by Richard Reibstein

Posted in IC Compliance