Last month, half of the cases that came to our attention in the area of independent contractor misclassification and compliance involved interesting issues concerning arbitration – and lessons for companies seeking to limit class action lawsuits by those they classify as ICs.
The first case involved an IC agreement that included a class action waiver but did not include an agreement to arbitrate. Companies that have had a less than favorable experience with arbitration, where there are minimal rights to appeal an unfavorable award, but wish to include a class action waiver in their IC agreements, should take note: a class action waiver may only be enforceable if accompanied by an arbitration clause.
The second case involved two arbitration clauses arising in the health care context: the first in a physician’s employment agreement with a medical center and the second in the physician’s IC agreement with the hospital, entered into after she had been converted from W-2 to 1099 status. In response to the medical center’s motion to compel arbitration, the physician argued that the arbitration clause in the IC agreement was narrower in scope than the clause in her employment agreement and did not cover her retaliation claims. The physician also argued that the arbitration clauses did not cover the hospital’s administrator, whom she sued for fraud. While the court eventually rejected both arguments in an extensive opinion, better drafting of the arbitration clauses could have negated these arguments and simplified the hospital’s effort to compel arbitration.
The third case involved the an argument by a janitorial franchisee, who signed a franchise agreement containing an arbitration clause, that the franchisor, a cleaning services company, had waived its right to arbitrate the franchisee’s IC misclassification claim. At the same time it made a motion to compel arbitration, the franchisor chose to make a motion to dismiss, attaching documents that were outside the four corners of the pleadings. The lower court concluded that the franchisor had waived its right to compel arbitration by its action in making a motion to dismiss, but an appellate court reversed, concluding that because the lower court did not rule on the motion to dismiss on the merits or rely on the additional materials submitted, the franchisor had not waived its right to arbitrate the dispute. The lesson for other companies seeking to compel arbitration: just move to compel and avoid superfluous litigation that can potentially waive your right to arbitrate.
While more and more companies are including arbitration clauses with class action waivers in IC agreements, it is critical to draft them well and effectively enforce them. As we noted in our October 1, 2017 blog post commenting on the next day’s oral argument before the U.S. Supreme Court in a case involving the enforceability of arbitration agreements with class action waivers, there are ways to draft such clauses that can circumvent arguments by those seeking to negate their effectiveness.
Arbitration clauses with class action waivers, even those drafted well, are not a cure-all for companies that seek to insulate their use of independent contractors from legal attack. Such clauses can protect against a claim being asserted as a class or collective action; they don’t, however, provide a defense to a claim that employees were not properly paid or that workers classified as independent contractors were not misclassified and allegedly are owed overtime, minimum wages, employee benefits, expense reimbursement, or other workplace benefits available to employees.
Further, arbitration agreements with class action waivers are not binding on governmental regulators and 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. 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. One example is California’s Private Attorneys General Act (PAGA).
Businesses that wish to minimize potential workplace liability exposure from independent contractors can, of course, conduct an internal workplace audit. Such 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; they do not ordinarily provide companies with the tools needed to enhance their compliance with independent contractor laws. Businesses that wish to fortify their independent contractor compliance can use a proprietary process such as IC Diagnostics™ that enables them to consider alternative ways to minimize misclassification liability, including restructuring, re-documenting, and re-implementing their independent contractor relationships.
In the Courts (6 cases)
CLASS ACTION WAIVER IN AN IC AGREEMENT NOT SUFFICIENT TO FORESTALL CLASS AND COLLECTIVE ACTIONS WHERE IC AGREEMENT DID NOT INCLUDE AN ARBITRATION CLAUSE. An Ohio federal court has denied a motion by U.S. Cargo and Courier Service, LLC, a diversified carrier that provides high-value, low-cost ground delivery/courier services and logistics solutions, to dismiss a proposed collective action under the Fair Labor Standards Act by delivery drivers claiming that they were misclassified as independent contractors and not employees. The company had argued, among other things, that the drivers’ class and collective claims should be dismissed because the drivers had signed independent contractor agreements with the company in which they waived their rights to class certification. In rejecting that argument, the court concluded that class action waivers without an arbitration provision are invalid. Specifically, the court relied on a prior decision by the U.S. Court of Appeals for the Sixth Circuit that “employees cannot waive their FLSA rights [to assert claims in a collective action] where there is no ‘contrary congressional command,’ such as the presence of an arbitration agreement.” It continued: “[W]ithout an arbitration provision or any other countervailing federal policy that outweighs the policy articulated in the FLSA [conferring employees the right to litigate on a collective basis],” any waiver of employees’ collective action rights is invalid.”
The court also granted the drivers’ motion for conditional certification of their collective action after applying the “modest plus test,” which “requires an elevated factual showing, something beyond what is alleged in the pleadings and otherwise advancing the ball down the field beyond the pleadings.” In satisfying the standard, the drivers showed they were similarly situated to proposed class members through declarations stating that they and the proposed class members’ claims are unified by a common fact-based theory that they have been misclassified as independent contractors; all of the drivers were required to comply with the company’s appearance standards including wearing a uniform selected by the company and purchased through a specific supplier; all drivers were paid in accordance with the mileages and stops within their assigned routes at a rate determined by the company; and all of the drivers signed the same independent contractor agreement. Hall v. U.S. Cargo & Courier Service, LLC, No. 16-cv-330( S.D. Ohio Mar. 9, 2018).
PHYSICIAN CLAIMING SHE WAS CONVERTED TO INDEPENDENT CONTRACTOR REQUIRED TO ARBITRATE HER EMPLOYMENT DISCRIMINATION AND OTHER CLAIMS. A Mississippi federal court has compelled arbitration of a claim by a physician, who was re-classified as an independent contractor, that she was discriminated against by a medical center because of her age and gender, was subjected to retaliation, wrongful termination, and intentional interference with her contracts with the hospital, and was defrauded by the medical center and a hospital administrator. The physician provided services to North Mississippi Medical Center’s Emergency Department. Initially, the physician was classified as an employee of the medical center and executed an employment agreement that contained an arbitration clause that survived the termination of the agreement. The medical center later changed its business model, terminated all employment contracts, and offered the physician an independent contractor agreement, which (like the employment agreement) also contained an arbitration clause. The medical center made a motion to compel arbitration of all of her claims. The physician argued that at least one of her claims – the one alleging retaliation – was not covered by the arbitration clause, which only covered claims that “arise under or relate to” the contract; she also argued that that the scope of the language of the arbitration clause in the IC agreement was narrower than the scope of the clause in the employment agreement. The court found that even the more narrow clause covered all of her claims, drawing on other provisions in the IC agreement that covered the retaliation claim. The physician also argued that she should not be required to arbitrate her fraud and intentional interference with contract claims against the administrator as he was not a party to the arbitration agreement. The court rejected that assertion, concluding that where a party’s claims against a non-signatory to an arbitration agreement involve actions taken by an agent of a signatory to the agreement, the non-signatory can also enforce the arbitration clause. Begole v. N. Miss. Med. Ctr., Inc., No. 17-cv-33 (N.D. Miss. Mar. 23, 2018).
CLEANING SERVICES FRANCHISOR SUCCEEDS IN VACATING NO-ARBITRATION ORDER IN IC/FRANCHISEE MISCLASSIFICATION CLAIM. A Massachusetts appellate court has vacated a lower court’s order denying a motion by janitorial services company, Jan-Pro Franchising International, Inc. to compel arbitration of claims brought against it by a franchisee for allegedly misclassifying him as an independent contractor and violating his rights under the state’s wage Act. The lower court had held that Jan-Pro had waived its right to compel arbitration, and Jan-Pro appealed the decision. On appeal, the court stated: “[t]he essential question is whether, under the totality of circumstances, the defaulting party acted ‘inconsistently’ with the arbitration right.” In ruling in favor of Jan-Pro that it had not waived its right to arbitrate, the Court considered several factors including that Jan-Pro communicated its intention to seek arbitration even before this particular franchisee had sued; reiterated that intention continuously; and never filed a counterclaim or took discovery before filing the motion to compel arbitration. The appellate court also noted that although Jan-Pro had sought to dismiss the case on the merits and had attached materials outside the pleadings to its motion, the trial court did not refer to those materials or rule on the merits of the motion to dismiss. Brandao v. Jan-Pro Franchising International Inc., No. 17-P-636 (Mass. App. Ct. Mar. 22, 2018).
CABLE TECHNICIANS GRANTED CONDITIONAL CLASS CERTIFICATION IN IC MISCLASSIFICATION CLAIM. Michigan cable technicians have been given the go-ahead by a federal district court to proceed with their IC misclassification lawsuit on a collective basis under the federal Fair Labor Standards Act. The action seeks minimum wage and overtime compensation allegedly unpaid to the cable technicians as “employees” under the FLSA. They claim that they were misclassified as independent contractors by Piron, LLC and Reynolds Quality Installations, Inc., which provided cable installation and repair services to Aero Communications, Inc. and a nationwide cable provider. According to the plaintiffs, they shared the same positions, duties, performance expectations, equipment, and technology, and were subject to the same discipline procedures. The court noted that in seeking conditional certification as a collective action, after which the plaintiffs would be permitted to provide formal notice of the lawsuit to other cable technicians, “the plaintiff must only ‘make a modest factual showing’ that [the plaintiff] is similarly situated to the other employees he [or she] is seeking to notify.” Applying that fairly lenient standard, the court found that “the plaintiffs had presented sufficient evidence that individuals who Piron and Reynolds Installations [allegedly] jointly employed to perform cable technician services . . . were not paid minimum wage or overtime wages” which they were allegedly due. Ali v. Piron, LLC, No. 17-cv-11012 (E.D. Mich. Mar. 16, 2018).
INSURANCE COMPANIES DENIED MOTION TO DISMISS INSURANCE AGENT’S CLASS ACTION FOR IC MISCLASSIFICATION. A Texas federal court has adopted a Magistrate Judge’s report and recommendation denying a motion to dismiss by a group of insurance companies seeking to dispose of an independent insurance agent’s proposed collective action seeking overtime under the Fair Labor Standards Act. The agent alleged that he and other similarly situated agents were misclassified as independent contractors. The insurance companies argued that the plaintiff was not covered by the FLSA because he entered into an independent contractor agreement with Texas Farm Bureau Casualty Insurance Company (TFB) and other related insurance companies in the name of his corporation, Chris Ferguson Insurance Services, Inc., for whom he was the sole shareholder and president. The court rejected the companies’ argument that a person cannot be an employee for purposes of the FLSA simply because “the putative employer acquired the person’s labor through a contract with a business entity rather than the person.” The carriers also argued in their motion to dismiss that, as a matter of law, the plaintiff was an independent contractor. The court denied that portion of the motion as well, stating that the agent had alleged in his complaint sufficient facts to demonstrate employee status: he had worked exclusively for the TFB Defendants for 12 years, was issued TFB business cards, had a TFB email address, and was “closely supervised” by TFB management. Ferguson v. Tex. Farm Bureau Bus. Corp., No. 17-CV-111 (W.D. Tex. Mar. 20, 2018).
$4.59 MILLION JURY VERDICT IN FAVOR OF EXOTIC DANCERS APPROVED BY COURT IN IC MISCLASSIFICATION TRIAL. A Pennsylvania federal judge approved a jury’s verdict of $4.59 million in favor or a class of exotic dancers in suit brought against 3001 Castor Inc. d/b/a The Penthouse Club of Philadelphia, an adult entertainment club. The lawsuit alleged nationwide collective claims under the FLSA to recover unpaid wages, as well as state wage/hour claims due to misclassification as independent contractors. The jury reportedly found that by obligating the dancers to pay certain fees for their shifts worked, the Club violated federal and state wage and hour laws and owed the dancers over $4 million in unpaid wages. As we reported in our blog post of December 6, 2016, the Pennsylvania federal court had denied a motion by the Club seeking to decertify the case as a class action. The court determined that the dancers were similarly situated because all worked in the same location; all were advancing similar misclassification claims; all sought the same form of relief; and all were paid nothing by the Club and shared similar employment circumstances. The Club had argued on the merits that the monies received by the dancers from patrons were wages, but the court concluded they were tips. Additionally, the Club was found to have violated the FLSA by requiring the dancers to rent stage time from the Club for each shift; provide designated tips to the disc jockey, “house mom,” and podium host; and pay fines for violations of house rules. Verma v. 3001 Castor Inc., No. 13-cv-03034 (E.D. Pa. Mar. 23, 2018).