Hoopla Over Arbitration of IC Misclassification Cases Makes Little Sense: October 2023 ‎IC Legal News Update

Companies can use two independent grounds to compel arbitration of independent contractor misclassification lawsuits: the Federal Arbitration Act (FAA) and state arbitration laws. The FAA, however, includes an exemption for workers engaged in interstate transportation. This exemption has consumed the attention of lawyers and courts for years, with numerous disputes over which types of workers are covered by the FAA’s arbitration exemption. Last month we reported in a blog post that the U.S. Supreme Court accepted a case addressing the application of that exemption to independent contractors who distribute food products to grocery and convenience stores for companies that manufacture the goods. The question presented to the Supreme Court is whether the FAA exemption applies to workers that are actively engaged in interstate transportation for companies that are not in the transportation industry. The Supreme Court typically grants review of cases only where they have outsized legal significance, but because lawsuits are also subject to arbitration under state law – regardless of whether the litigants are covered by or exempt from arbitration under federal law – there is little reason for the courts to continue to spend time and resources deciding if the FAA’s exemption applies. As reported below, this very issue was posed by a court last month when it stated that a state’s arbitration law may well have given it grounds to compel arbitration of an independent contractor misclassification dispute, even if the workers were covered by the FAA’s interstate transportation exemption. As we have noted repeatedly in several of our blog posts, an arbitration clause drafted in an effective manner as one part of an IC compliance program should provide sufficient grounds for a company to compel arbitration of misclassification disputes by independent contractors, even if the FAA’s interstate transportation exemption otherwise applies.

In the Courts (2 cases)

COURT STAYS DECISION INVOLVING FAA’S ARBITRATION EXEMPTION PENDING SUPREME COURT REVIEW.  A Massachusetts federal district court has stayed its proceedings in an independent contractor misclassification class action, pending a decision by the U.S. Supreme Court in a case that (as noted above) the high court accepted for review in September 2023. This federal district court case in Massachusetts involves the same type of claims, the same type of distributors, and the same corporate parent as in the Supreme Court case, but was brought in a different jurisdiction under a different state’s wage and hour laws.  In 2021, distributors of baked food products commenced a class action for IC misclassification against Lepage Bakeries, CK Sales, and Flowers Foods (the “companies”), who thereafter filed a motion to compel arbitration of the claims under the FAA. The district court denied the motion in 2022 when it concluded that the drivers were exempt from arbitration under the FAA’s interstate transportation worker exemption. Although the court denied the motion to compel arbitration under the FAA, it invited the companies at that time to file a motion addressing the remaining issue of whether the Massachusetts arbitration law provided an alternative basis to compel arbitration.  Instead, for strategic reasons, the companies chose to appeal the decision denying their motion to compel arbitration under the FAA to the U.S. Court of Appeals for the First Circuit. In May 2023, the First Circuit affirmed the district court’s denial of the companies’ motion to compel arbitration. In July 2023, the companies filed a motion to compel arbitration under the Massachusetts arbitration law. The district court denied that motion, concluding that the companies had waived their right to compel arbitration under Massachusetts arbitration law by failing to file that motion back in 2022 when it was invited to do so, instead choosing to appeal the FAA issue to the First Circuit. The district court, however, has stayed its proceedings pending the U.S. Supreme Court’s review, which we referenced above. Canales v. Lepage Bakeries Park Street LLC, No. 1:21-cv-40065 (D. Mass. Oct. 31, 2023)‎.

The question under review by the Supreme Court in the related case, called Bissonnette v. LePage Bakeries Park Street, LLC, is as follows: “To be exempt from the Federal Arbitration Act, must a class of workers that is actively engaged in interstate transportation also be employed by a company in the transportation industry?”  But does that issue really matter when, as noted above in the introduction to this blog post, a state arbitration law provides an alternative to the FAA for companies seeking to compel arbitration? Further, the Bissonnette case does not involve a class of workers who appear to be actively engaged in interstate transportation – their interstate transportation activity is only an allegation in the complaint. The underlying contract with the plaintiff distributors confirms that they are not engaged to drive or transport products but rather to sell to, solicit, and service food stores, where transportation of the goods is arguably only incidental to the work being performed by the distributors or their helpers. For this reason as well, whatever the Supreme Court decides in Bissonnette will have limited significance.

COURTESANS HELD TO BE INDEPENDENT CONTRACTORS.  Few industries are immune from independent contractor misclassification claims, as a recent case involving courtesans demonstrates. Nevada regulates and licenses brothels, which engage courtesans, who are legal escorts / prostitutes. Last month, a Nevada federal court granted a brothel’s motion for summary judgment in a class action lawsuit alleging that the courtesans had been misclassified, dismissing state and ‎federal claims brought by the plaintiff courtesan. In her proposed class action ‎against the brothel known as the Chicken Ranch, the courtesan claimed that the brothel violated various state wage and hour and race discrimination laws. In granting the brothel’s motion for summary judgment, ‎the court relied on the independent contractor agreement signed by each courtesan and the ‎courtesan’s own deposition testimony that supported IC status. Among other things, the ‎courtesan selected her own work hours and provided services based on her availability; ‎exclusively controlled how much time was involved in the services, what services to provide, ‎how to provide them, to whom they would be provided, and how much she charged for them; ‎worked at other legal brothels contemporaneously with Chicken Ranch; agreed to file her own ‎taxes as a self-employed business; and had the opportunity for profit based on her own managerial skills. ‎James v. Western Best LLC, No. 2:19-cv-01690 (D. Nev. Oct. 16, 2023).

Regulatory and Administrative Initiatives (1 matter)

NEW NLRB JOINT EMPLOYER REGULATION EXPOSES COMPANIES TO GREATER RISK OF IC MISCLASSIFICATION EXPOSURE.  The National Labor Relations Board (NLRB) issued a final rule on October 26, 2023, revising the test for determining whether multiple companies may be considered as joint employers under the National Labor Relations Act. The Final Rule states that “consistent with the common-law principles governing the Act’s interpretation,” it is appropriate for the Board “to give determinative weight to the existence of a putative joint employer’s authority to control essential terms and conditions of employment, whether or not such control is exercised, and without regard to whether any such exercise of control is direct or indirect, such as through an intermediary.” (Emphasis added.) As we discussed in our blog post of October 27, 2023, the revised test borrows from the right to control standard that has historically been applied in determining whether a group of workers are independent contractors or employees under many state and federal wage and employment laws. Under that test for IC status, a worker may be deemed an employee instead of an IC if, under the parties’ contract, the company reserves the right to control the manner and method of performance, regardless of whether such control is exercised. Prior to the NLRB’s issuance of its new joint employer rule, unreserved rights to control would not alone create joint employment status; rather, such reserved rights would need to be accompanied by the exercise of control.

This new joint employer test under the National Labor Relations Act, unless stricken down by the courts, will create increased legal exposure for franchisors, staffing companies, and other service recipients who have increasingly been targeted by unions. As we noted in our October 7 blog post, lawyers draft franchise agreements as well as service and staffing contracts that typically include dozens and sometimes hundreds of provisions that needlessly reserve control over an endless array of matters. Some of those contract provisions may arguably implicate “essential terms and conditions of employment” of the employees of franchisees or service providers – precisely what the NLRB’s new joint employer rule focuses upon. While not an easy task, companies can “unlawyer” those types of provisions that needlessly reserve control and replace them with clauses that avoid the type of reserved rights that are now in the crosshairs of the NLRB’s joint employer rule, as we noted in our recent blog post discussing the NLRB’s new joint employer rule.

Addressing a related employment law sector, the publisher of this blog was quoted in an October 30, 2023 article in Law360 by reporter Vin Gurrieri that he does not believe that the NLRB’s new joint employer rule will impact Title VII jurisprudence, explaining: “First, joint employer law under the federal non-discrimination laws is already well-established by the courts; second, the NLRB majority’s rule is confined to that labor relations statute. The NLRB’s new rule, however, could conceivably prompt the EEOC to issue its own joint employer rule sometime in the future, but that is highly unlikely.”

Other Noteworthy Items (2 matters)

APP-BASED GIG WORKERS MAKING DELIVERIES ARE BEING TREATED BY NYC LEGISLATORS AS INDEPENDENT CONTRACTORS. New York City legislators have decided to treat certain app-based delivery drivers and couriers as independent contractors and have passed legislation increasing their minimum pay rates. As noted in an article published in Law360’s Employment Authority by Jon Steingart on October 16, 2023, other state and local jurisdictions are looking into providing protections for independent contractors who would not otherwise be entitled to them. The publisher of this blog was quoted in the Law360 article: “[I]t’s ironic that advocates have decoupled calls for worker protections from their argument for employee status under existing laws. If worker advocates had been successful arguing that existing worker protection laws cover gig workers because they’re actually employees who’ve been misclassified as independent contractors, a minimum pay standard wouldn’t be necessary. It’s a fascinating construct here that suggests to me that the efforts to find that app-based delivery drivers and couriers are not independent contractors — that they’re misclassified, and that they’re employees — is not something that is succeeding on the ground or in the courts.”

HARVARD STUDY FINDS INCREASED USE OF INDEPENDENT CONTRACTORS BY BUSINESSES.  A survey conducted by the Harvard Business Review Analytic Services (HBRAS) reveals increasing reliance by businesses on freelance workers. In its report, “Taking a Strategic Approach to Using Freelance Talent,” released on October 31, 2023, HBRAS shared its findings that of 514 respondents familiar with their organization’s approach to employing freelance workers in the U.S., the ‎respondents estimate that 20% of their organizations’ work, on average, is being carried out by ‎freelancers. HBRAS Managing Director, Alex Clemente, reportedly stated, ‎“Using freelancers has a range of benefits, from greater agility and flexibility around staffing to ‎reducing the need for office space, to bringing in new skills quickly. One reason for the lack of a ‎strategy around the workforce may be that most companies have no clear oversight or process ‎around the hiring and management of freelancers.”‎ This last point dovetails with one of the keys of the IC Diagnostics (TM) process, enhancing corporate compliance with laws governing ICs and minimizing IC misclassification liability in a manner that is customized and sustainable, while being consistent with a company’s business model.

Written by Richard Reibstein

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