Misclassification & Arbitration Agreement Scheme

Public Justice provides an excellent overview and commentary on a recent court opinion that struck down a scheme where the employer misclassifies employees as independent contractors and then requires the workers to give up their right to file a lawsuit in court by signing an arbitration agreement.
Here are excerpts:

It’s a clever scheme: Pretend your workers are independent contractors rather than employees, so you can skirt labor laws and avoid pesky requirements like, say, the minimum wage.  And then protect yourself from liability—after all, misclassifying employees as independent contractors is illegal—by requiring anyone who works for you to sign an arbitration contract, giving up their right to sue you in court.

Misclassification Schemes Are Growing in Popularity!

At many companies, this scheme has become standard practice. And it’s particularly common in the trucking industry—an industry that employs millions.

But trucking companies shouldn’t be able to use this scheme. The Federal Arbitration Act—the law the companies depend on to enforce the arbitration contracts they force their workers to sign—explicitly exempts the “contracts of employment” of transportation workers.  That’s no problem, the trucking companies have been arguing.  Our drivers, they say, are independent contractors, not employees, and therefore their contracts can’t possibly be “contracts of employment.”  And, for a while, some trial courts bought it.

But now the jig is up.  The first appellate court to decide the issue has now made clear that transportation companies cannot force their workers to arbitrate when they would not otherwise have to, simply by (mis)classifying them as independent contractors. 

Understanding the Federal Arbitration Act

As the court explained, when the Federal Arbitration Act was passed in 1925, the term “contracts of employment” was universally understood to apply to all agreements to do work—regardless of whether the worker was an employee or an independent contractor.  And Congress used that broad term with good reason: The Federal Arbitration Act was passed at a time of tremendous strife within the transportation industry—disputes between transportation workers and their employers had repeatedly disrupted interstate commerce and, sometimes, even resulted in violence.  Congress exempted transportation workers from the Arbitration Act to ensure a public resolution of—and public authority over—these disputes that threatened the economic security—and, in some cases, the physical safety—of the nation.

A Huge Win for Transportation Workers

This decision is a huge win for transportation workers—and for the fight against forced arbitration.  For the millions who work in the transportation industry, the opinion puts the lie to the argument that transportation workers can be forced into arbitration simply because they are—or, worse, because their employer falsely claims they are—independent contractors.  And for anyone fighting forced arbitration, the decision makes clear that whether the Federal Arbitration Act applies in the first place is always a question for the court—not an arbitrator—to decide.