A Company’s Best Friend ‎– An Effectively-Drafted Arbitration Clause in an IC Agreement: December 2020 News Update

December was a very slow month for court decisions affecting independent contractors, but both decisions reported below confirm that effectively drafted arbitration clauses remain one of two “best friends” for businesses that engage independent contractors. On the very day the U.S. Supreme Court issued its decision in New Prime Inc. v. Oliveira in January 2019, we predicted here that, despite some commentators’ exuberance and others’ despair, the decision “may have little or no impact as to whether workers classified as independent contractors can be compelled to arbitrate their IC misclassification claims.”  In New Prime, the Supreme Court held that a court, not an arbitrator, should decide if an IC is covered by the Federal Arbitration Act’s arbitration exclusion for workers engaged in interstate transportation. We commented that the FAA is not the only basis upon which companies can seek to compel arbitration; most state arbitration laws, which typically do not have exclusions for interstate transportation workers, also may provide an alternative basis to compel arbitration of IC misclassification class action claims. That is exactly what transpired in one of the two IC arbitration cases we discuss below.

The other best friend for businesses using ICs is the maintenance of an independent contractor relationship that has an enhanced level of compliance with federal and state IC laws. This can be accomplished through a process such as IC Diagnostics (TM) that restructures, re-documents, and re-implements IC relationships in a customized and sustainable manner consistent with a company’s existing business model. The combination of an effectively-drafted arbitration agreement with class action waiver together with the use of a process such as IC Diagnostics  minimizes not only a company’s exposure to IC misclassification liability but also the likelihood of even being sued in the first place – or being sued repeatedly, as many companies have endured.

In the Courts (2 cases)

NEW JERSEY PHARMA DELIVERY SERVICE WINS LENGTHY BATTLE TO COMPEL ARBITRATION OF COURIERS’ MISCLASSIFICATION CLAIMS.  A pharmaceutical delivery service, USPack Logistics, LLC, finally won the right to arbitrate wage and hour class action claims asserted by couriers delivering pharmaceutical products on its behalf. The named plaintiff, a delivery driver, alleged in his 2015 class action complaint in federal court in New Jersey that the company violated New Jersey wage and hour laws as a result of its practice of improperly classifying him and other courier drivers as independent contractors and not employees. At the outset of their relationship, the driver signed an agreement that included an arbitration provision with class action waiver language.  The contract called for arbitration of disputes in accordance with the Federal Arbitration Act and it included a “severability” clause that provided that if any provision in the agreement was unenforceable, the remainder of the contract still would be valid. The agreement did not specify what law would apply if the FAA was deemed inapplicable or what law would determine the enforceability of the arbitration provisions. In 2015, USPack filed a motion to compel arbitration. After the motion was denied without prejudice, it was renewed by USPack in 2020.  A Magistrate Judge denied the motion, concluding that the plaintiff was exempt under the FAA from arbitration as a transportation worker and because the arbitration provision did not include an alternate mechanism to compel arbitration in the event the FAA was deemed inapplicable, there was no basis for compelling arbitration and the contract was unenforceable for lack of mutual assent.

In July 2020, as reported in this blog, the New Jersey Supreme Court issued an opinion in Arafa v. Health Express Corp., holding that the New Jersey Arbitration Act applies to arbitration agreements “even without being explicitly referenced in the arbitration agreement; no express mention of the NJAA is required to establish a meeting of the minds that it will apply inasmuch as its application is automatic.”  Thereafter, the U.S. District Judge assigned to the USPack case overruled the Magistrate Judge’s recommended order denying the company’s motion to compel arbitration and remanded the case back to the Magistrate Judge in light of the Arafa decision. The court stated: “The New Jersey Supreme Court has now made clear that if a contract also contains a clear severance clause, as it did here, a court should not vitiate the entire agreement if it determines that the FAA does not apply. Rather, the court should automatically apply the NJAA and grant a motion compelling arbitration if it otherwise determines that the standard to grant a motion to compel is satisfied.” Easterday v. USPack, No. 15-cv-07559 (Dec. 4, 2020).

INSTACART SUCCEEDS IN COMPELLING ARBITRATION BY SHOWING THAT DELIVERY AND PERSONAL SHOPPERS ARE NOT INTERSTATE TRANSPORTATION WORKERS.  An Illinois federal court has ordered delivery and personal shoppers providing services to Instacart to individually arbitrate wage and hour claims arising from their alleged misclassification as independent contractors. Instacart is a California-based technology company that connects customers and personal shoppers, drivers and delivery persons via the Instacart website and its smartphone app to facilitate same day, on-demand grocery shopping and delivery services in major metropolitan areas, including Illinois. The three named plaintiffs brought the proposed class action against Instacart on behalf of themselves and similarly situated personal shoppers alleging violations of the Fair Labor Standards Act and various Illinois wage and hour statutes. Prior to commencing their relationship with Instacart, each plaintiff signed an Independent Contractor Agreement, including an arbitration clause with a class action waiver. In granting Instacart’s motion to compel arbitration, the court concluded that the parties agreed the Agreement was to be governed by the Federal Arbitration Act; there is a written arbitration agreement between the parties from which none of the named plaintiffs chose to opt-out, although each had the option to do so; each operative agreement included provisions in which the shopper agreed to pursue any claims against Instacart only in their individual capacities, rather than as part of a class action or other representative proceeding; and the plaintiffs’ claims fell within the scope of the arbitration agreement. Additionally, the court rejected the plaintiffs’ argument that they satisfied the transportation worker exemption of the Federal Arbitration Act, finding that “though Instacart’s business model may depend on a series of internet transactions connecting customers and Shoppers, neither Instacart nor Instacart Shoppers are engaged in the enterprise of moving goods across state lines.” The court further concluded that the FAA’s requirement that courts apply arbitration agreements according to their terms includes “enforcing terms reflecting the parties’ intention ‘to use individualized rather than class or collective action procedures.’” O’Shea v. Maplebear Inc. d/b/a Instacart, No. 19-cv-06994 (N. D. Ill. Dec. 21, 2020).                                                                                                                           

Legislative Developments (2 items)

PANDEMIC UNEMPLOYMENT ASSISTANCE EXTENDED FOR INDEPENDENT CONTRACTORS.   Independent contractors and other self-employed individuals are covered by the stimulus bill signed by the President on December 27.  As detailed in our blog post that day, the stimulus bill Congress passed on December 21 extended unemployment assistance for 11 weeks not only for employees but also for independent contractors and other self-employed individuals. The bill (H.R. 133) includes the “Continued Assistance for Unemployed Workers Act of 2020,” which provides for an extension of the CARES Act unemployment provisions from December 31, 2020 until March 14, 2021, including provisions that had created a new form of benefits for all self-employed individuals: pandemic unemployment assistance (PUA).  The new stimulus bill, CARES Act II, halves the amount of PUA in the original CARES Act by limiting PUA to $300/week. those eligible for PUA also will receive an additional $300/week through the end of the extension period, whereas CARES Act I had added $600/week in federal stimulus payments. Finally, the new stimulus bill provides independent contractors with paid sick and family leave benefits through March 14, 2021. A number of new applications for PUA by independent contractors are likely to be filed without a designation that the claimant is self-employed, as was often the case under the original CARES Act.  This could result again in legal challenges for companies to the extent it leads to the creation of a false record that contractors are employees of the company.  Businesses should timely contest such applications to avoid erroneous assessments of unpaid unemployment taxes, which could in turn prompt audits by state workforce agencies of the classification status of other similar workers treated by companies as independent contractors.

VIRGINIA INDEPENDENT MISCLASSIFICATION LAW TO TAKE EFFECT.  A Virginia law intended to combat independent contractor misclassification took effect on January 2.  As we mentioned in a prior blog post, in the spring of 2020 Virginia Governor Ralph Northam signed into law four sets of bills intended to combat worker misclassification. Three of those four laws became effective in July 2020; the last one became effective as of January 2, 2021. House Bill 1407 and Senate Bill 744 (signed into law on April 6 and effective January 2, 2021) authorize the Department of Taxation to oversee ‎investigations into suspected cases of worker misclassification and levy appropriate penalties. This enactment provides that ‎if an individual performs services for an employer for ‎remuneration, that worker shall be ‎considered an employee of the party that pays him/her unless the worker or the company demonstrates  the individual is ‎an independent contractor. The Department is to apply Internal Revenue ‎Service guidelines to ‎determine whether an individual is an ‎independent contractor.‎ Failure of an ‎employer to properly classify an ‎individual as an employee may result in civil penalties ‎up to $1,000 per misclassified individual for a first offense, up to ‎‎$2,500 for a second offense, and up to $5,000 for a third and subsequent offense.‎

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