Tomorrow, October 2, the Supreme Court will hear argument on what many commentators are calling one of the biggest issues affecting companies in the past decade – whether mandatory arbitration clauses with class action waivers in the employment context violate the National Labor Relations Act and are therefore unenforceable, or whether the Federal Arbitration Act, which favors arbitration of disputes, overrides the NLRA. Whatever the decision is, though, it is unlikely to have much of any impact on employers or businesses using independent contractors – even when sued by workers claiming to be employees – if they are savvy enough to have drafted their independent contractor agreements in a manner that will be enforceable regardless of the way in which the Court rules.
Following oral argument tomorrow in a trio of cases including one where the National Labor Relations Board is a party, there is likely to be a flood of legal commentators predicting what the Supreme Court is likely to decide based on questions posed to the parties’ lawyers by the Justices. The outcome may not be particularly meaningful for some companies if they have taken steps to bullet-proof these types of agreements. As discussed in the “Takeaways” at the end of this commentary, though, state-of-the-art arbitration agreements are not a panacea to protect against workplace liability. Rather prudent companies have not only shored up their arbitration agreements, but also taken steps to enhance their compliance with applicable employment and independent contractor laws.
The Likely Impact of the Supreme Court’s Decision – Whatever It Decides
On the one hand, if the Supreme Court holds that the NLRA is not violated by a class action waiver or that the FAA overrides the NLRA, then virtually all such arbitration agreements with class action waivers (if properly drafted) would require workers to litigate their cases on an individualized basis before an arbitrator – and not on a class or collective basis before a judge in a courtroom.
This would be a huge blow to plaintiffs’ class action lawyers. It would also prompt more businesses that have yet to use these types of arbitration agreements to include these types of clauses in their employee and independent contractor agreements.
On the other hand, what if the Supreme Court holds that the NLRA is violated by mandatory arbitration agreements with class action waivers and finds that the FAA does not override the NLRA? In that event, such arbitration agreements will not be enforceable, and employees and independent contractors claiming they have been misclassified will be able to bring and maintain wage, discrimination, and other types of lawsuits on a class or collective action basis – unless the company’s arbitration clause with a class action waiver includes a state-of-the-art “opt-out” clause.
Opt-Out Clauses Are Likely to Moot Any Argument That Such Agreements Are Unenforceable
If an employee or independent contractor can “opt out” of the arbitration agreement within a specified period of time, the agreement is no longer mandatory in nature because the employee or independent contractor has a choice whether to accept the clause or not. Savvy companies have already figured this out and have included an opt-out provision in their arbitration agreements to protect against a possible invalidation of class action waivers by the Supreme Court.
While the Obama-era NLRB has said that an opt-out clause may also violate the NLRA, that position is likely to change under an NLRB soon to be comprised of a Republican majority of its five Board members. Further, the federal courts have generally found that opt-out clauses in arbitration clauses with class action waivers defeat the argument that a class action waiver violates the NLRA.
In any event, there are ways to carefully draft opt-out provisions that would likely survive scrutiny even under the current NLRB decisions from the Obama era.
Thus, those companies using arbitration agreements containing a state-of-the-art opt-out clause are not likely to be the least bit nervous about the upcoming Supreme Court decision, as it only deals with mandatory arbitration clauses with class action waivers. Whatever the decision, it is unlikely to have any application to them. Nor should companies that have enhanced their compliance with employment and independent contractor laws be concerned about the eventual decision by the Supreme Court of the cases being heard tomorrow.
Many companies have mistakenly concluded that an arbitration clause with a class action waiver is all they need to do in order to protect themselves from workplace liability. 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 any defense to a claim that employees were properly paid or that workers classified as independent contractors are not misclassified employees who allegedly are owed overtime, minimum wages, employee benefits, expense reimbursement, or other workplace benefits available to employees.
Arbitration agreements with class action waivers are also wholly ineffective at forestalling federal and state regulatory agencies from conducting audits or initiating and maintaining enforcement proceedings under employment and independent contractor laws. Such contractual clauses are not binding on governmental regulators. Hence, the importance of enhancing compliance with employment and independent contractor laws cannot be overstated.
And some state laws have been interpreted, at least at present, as not being susceptible to arbitration, such as California’s Private Attorneys General Act (PAGA).
Businesses that wish to minimize potential workplace exposure from employees and independent contractors can, of course, conduct an internal workplace audit. With regard to employees, companies can review compliance with the most troubling types of wage and hour requirements, such as whether an employee satisfies an overtime exemption. There are also some tried and true steps that employers can take to ensure that their audits won’t backfire on them and that the results are not only reliable but also useful in the event of a legal challenge.
In the area of independent contractor compliance, internal audits are typically most effective at determining that a group of workers paid on a 1099 basis do not satisfy the applicable tests for independent contractor status. Such audits do not ordinarily provide companies with the tools needed to enhance their independent contractor compliance of those workers. Businesses that wish to fortify their independent contractor compliance can use a proprietary process such as IC Diagnostics™ that enables companies to consider alternative ways to minimize misclassification liability, including restructuring, re-documenting, and re-implementing their independent contractor relationships.