Two recent federal appellate court decisions struck down Amazon’s arbitration clause in its agreements with workers who deliver its packages to Amazon customers. Those two rulings have created great concern for businesses in the transportation industry. However, it is important to understand that the contractual language at issue in these two cases is unique to Amazon. In most instances, arbitration agreements with class action waivers can be enforceable, even when applied to workers who deliver or transport products in interstate commerce. This blog post provides tips for companies in all industries (including the transportation, delivery, and logistics sectors) how to more effectively draft arbitration provisions with class and collective action waivers in their independent contractor agreements.
Most court decisions enforcing or striking down arbitration provisions focus on specific wording in arbitration agreements drafted by the company. A well-drafted arbitration clause with class action waiver should, with few exceptions, foreclose a class or collective action and require plaintiffs to arbitrate their claims on an individual basis. An ineffectively drafted arbitration clause can, on the other hand, obligate a company to defend itself in a class or collective action in court.
Plaintiffs’ class action lawyers routinely challenge arbitration clauses with class action waivers; they regard such agreements 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. On the other hand, businesses using arbitration agreements view them as a means to curtail costly class and collective actions when only a few members of the class truly feel aggrieved.
In the Amazon cases recently decided by the U.S. Court of Appeals for the First and the Ninth Circuits, the courts found drivers making deliveries of Amazon packages to its customers to be transportation workers engaged in interstate commerce. Those workers are excluded from the arbitration provisions of the Federal Arbitration Act (FAA), but may still be subject to a state’s arbitration law.
Amazon’s independent contractor agreement specifically excluded the application of the arbitration statute of Washington State, where Amazon has its headquarters. If the agreement had selected Washington’s arbitration law to apply, in addition to or in lieu of the FAA, Amazon would likely have been able to compel arbitration of the drivers’ claims that they were misclassified as independent contractors.
The following are a dozen tips on more effectively drafting arbitration provisions with a class and collective action waivers. (Note: collective actions are similar to class actions but require class members to “opt in” if they wish to participate instead of “opting out” if they do not wish to participate, as in class actions.) Not all of these suggestions may be applicable to every business; arbitration provisions, like many other clauses in independent contractor or employment agreements, need to be customized.
- In addition to or in lieu of the FAA, select a state arbitration law that favors arbitration and does not include exclusions for the type of workers involved. This suggestion is particularly important for workers who deliver goods or transport goods or people. Those workers may, depending on current court decisions, be excluded from arbitration under the interstate commerce transportation exclusion in the FAA. Therefore, the choice of law provision in an arbitration agreement should be carefully researched and analyzed, recognizing that the law generally does not allow parties to choose a state law that has little nexus to the parties or the dispute. In addition, some states, such as California, have laws that prohibit the application of another state’s laws for its residents.
- Separate and apart from the selection of a state arbitration law, a choice of law provision in an independent contractor agreement should avoid state laws unfavorable to legitimate independent contractor relationships.
- Consider adding to the arbitration clause language specifically designating as third-party beneficiaries all of the clients and customers of the business.
- When appropriate, cover disputes involving both the independent contractor as well as his/her business entity.
- Recite specifically that the arbitrator is not authorized to conduct (and/or unequivocally is prohibited from conducting) a class or collective arbitration proceeding or one that consolidates or joins the claims of others.
- Draft an arbitration clause language that 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 / collective action waivers but also frequently argue that arbitration provisions are unconscionable under applicable state law. Unconscionability arguments often are premised on the cost of arbitrator fees imposed upon the workers involved; a forum selection clause designating a distant location where disputes are to be resolved; limitations on statutory or common law remedies; restrictions on discovery; and a host of other provisions that may be overly favorable to companies.
- Because an arbitration agreement provides that the parties’ disputes will be decided by an arbitrator, it is advisable to state specifically that the parties are waiving their right to a jury trial and a decision by a court. At least one state requires notice to the parties that arbitration means that disputes will not be decided by a court or jury.
- Some state laws and 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, a conspicuous jury trial waiver within an arbitration clause is generally regarded as good practice. Those waivers can be highlighted in all capital letters, bold type, and/or larger size typeface.
- Avoid “burying” an arbitration clause deep within an independent contractor or employment agreement. Class action lawyers have argued that some arbitration provisions are non-consensual when employers place arbitration provisions at the end of lengthy independent contractor agreements without informing the worker in a more conspicuous location in the agreement that it contains a section providing for arbitration of certain disputes. Consider including a reference to the arbitration provision and the jury trial waiver in one of the “whereas” clauses or “recitals,” preferably on the first page of the contract.
- Include a state-of-the-art “delegation” of authority clause. This type of clause delegates authority to arbitrators to decide certain issues such as scope, application, or enforceability of an arbitration clause or the class or collective action waiver itself. Those issues may be decided by a court unless a delegation clause directs such matters to be decided by an arbitrator.
- Ensure your arbitration provisions are up to date; the law involving arbitration agreements remains in flux. A review of court cases over the past two years shows that plaintiffs’ class action lawyers are becoming more creative in their efforts to try to circumvent arbitration agreements with class action waivers. Oftentimes, arbitration provisions drafted several years ago are no longer state-of-the-art.
- Enhance your compliance with IC laws. Businesses that use independent contractors should not regard arbitration clauses with class and collective action waivers as immunity from liability for IC misclassification. These provisions, if properly drafted, can at most only avoid a claim being asserted as a class or collective action. They do not provide a defense to 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 and collective action waivers are not binding on government regulators. Therefore, they are wholly ineffective at forestalling federal and state 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 / collective 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 customized and sustainable solution.
The above suggestions are just some of many ways by which arbitration provisions with class and collective action waivers can be drafted effectively in the independent contractor and employment contexts.
Written by Richard Reibstein
This blog post includes material from the author’s article published in the Daily Labor Report (November 9, 2018). That material is reproduced with permission from Daily Labor Report Copyright 2018 by The Bloomberg Bureau of National Affairs, Inc. (800.372.1033) www.bna.com.