Of Employees and Independent Contractors: The Ninth Circuit to Consider Where Truck Drivers Fall

On February 24, 2017, Senior U.S. District Judge John W. Sedwick in the district of Arizona stayed a proposed class action in Virginia Van Dusen et al v. Swift Transportation Co., Inc. et al, No.: 2:10-cv-00899, against Swift Transportation Co., Inc. (“Swift Transportation”). The proposed class is comprised of about 600 members but could have implications for thousands of drivers for the company. This long-running case centers around claims that the trucking company incorrectly classifies its drivers as independent contractors. February’s ruling prevents any advancement until the Ninth Circuit hears the company’s challenge to the district court’s January 2017 ruling that its drivers’ contractor agreements were actually contracts of employment.

In the initial complaint, plaintiffs alleged that Swift Transportation incorrectly classified them as independent contractors as opposed to employees and failed to pay them proper wages under the Fair Labor Standards Act (FLSA) and under various provisions of the New York Labor Law and the California Labor Code. Plaintiffs sought relief from the court, requesting it enter an order declaring that Swift Transportation violated the FLSA, certifying the class, and awarding damages for unpaid wages, reimbursement for illegal deductions from wages, and an equal amount in liquidated damages and interest as well as attorneys’ fees. Illegal deductions, such as fuel costs, maintenance and repairs, and insurance, can be substantial in a trucking case, which makes trucking companies popular targets of class actions.

According to documents initially submitted to the court, twenty-five percent of Swift Transportation’s drivers worked in the company’s “owner operator division” and were considered independent contractors. Three-quarters of the trucks were driven by employees. The plaintiffs maintained that a majority of the “owner operators” did not own anything at all, but were instead selected by Swift to lease trucks from an affiliated company. They further argued that they should be considered employees because much of their day-to-day operations were within Swift Transportation’s control and oversight.

In determining whether the contractor agreements were exempt from arbitration under the Federal Arbitration Act (“FAA”) and the Arizona Arbitration Act (“AAA”), the court noted that § 1 of the FAA excludes “contracts of employment”. In assessing whether the Swift Transportation’s contractor agreements were exempt from the FAA, the federal district court looked to the four corners of the agreements. The agreements specified the type of work performed by the drivers, clearly showing that Swift Transportation’s “central mission” is delivering freight to customers across the country. The district court noted that the fact that its employees were doing the work of transporting on the company’s behalf suggested an employment relationship. Swift Transportation maintained, however, that the drivers were giving substantial autonomy and were free to do as much or as little as they wanted in order to profit as an independent driver. Other factors contained within the agreements bolstered the employment relationship, according to the court, including provisions regarding Swift’s control of its drivers’ schedules, load-determination and assignment, and per-mile rates paid to drivers. Moreover, these agreements were automatically extended on a year-to-year basis, a feature of employee status where the relationship is of possibly infinite duration. Thus, the court found that, within the four corners of the agreements, the contracts were those of employment and were exempt from arbitration under both the FAA and the AAA.

The federal district court also looked to other evidence to determine whether the independent drivers were employees. It noted that the plaintiffs had limited autonomy when it came to load assignments and payment structures. The fact that the plaintiffs were paid on a per-mile basis as opposed to time spent at work did not, in the court’s view, make the compensation project-based. Also, Plaintiffs were not paid after completion of a specific job but rather received settlement payments on a weekly basis similar to the regular paydays of Swift Transportation’s employee drivers. Even though Swift Transportation argued that plaintiffs were free to do as much or as few miles for the company as needed to profit as an independent driver, the combination of agreements and leases dictated a minimum amount plaintiffs needed to drive in order to pay for weekly rentals of leased trucks. As a result, the amount independent drivers had to drive for the company was the same as the employee drivers. It was also impractical for plaintiffs to “moonlight” or to turn down cargo loads in hopes of larger ones as there was no guarantee there would be one, which undermined the alleged freedom available to the independent drivers.

The lower court’s review of the agreements and of the additional factors is in line with the approach taken by the Ninth Circuit generally. In 2014, the Ninth Circuit held that the most important factor in determining a worker’s status is the amount of control exercised by the putative employer over the worker’s position. However, the Ninth Circuit also reviews the “totality of the circumstances,” similar to the test used by the U.S. Department of Labor when evaluating independent contractor status under the FLSA.

What is troubling for companies operating in multiple states is there is no complete consistency amongst the circuits as to how to assess the issue of employee versus independent contractor status. Even within the circuits themselves different tests are often used depending on from which state the case originated. Within Third Circuit, for example, there are several approaches. New Jersey expressly rejects the common law right to control test and instead courts apply the ABC test under N.J.S.A. 43:21-19(i)(6)(A)-(C):

  1. Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and
  2. Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
  3. Such individual is customarily engaged in an independently established trade, occupation, profession or business.

Delaware, on the other hand, uses the common law right to control test and courts focus on the amount of control “retained or exercised by the owner.” Delaware courts also look to the element of continuous subjection to the will of the principal, which is a defining factor in the worker-owner relationship.

In Pennsylvania, courts look to the common law factors which mirror those considered in the four corners assessment by the Ninth Circuit: control of manner work is to be done; responsibility for result only; terms of agreement between the parties; the nature of the work or occupation; skill required for performance; whether one employed is engaged in a distinct occupation or business; which party supplies the tools; whether payment is by time or by the job; whether the work is part of the regular business of the employer, and also the right to terminate the employment at any time.

While the Swift Transportation case will be instructive in determining whether truckers can be treated as independent contractors as opposed to employees, the lack of consistency among the circuits means that independent truckers will continue to be subject to challenge. Employers, therefore, need to be very careful in classifying their drivers as independent contractors, especially if their job duties and responsibilities are not materially different from those of its employee-drivers and if company maintains control over how the drivers perform their work.

For questions about independent contractors or trucking and logistics, please contact John Vreeland, Esq., Chair of the Transportation, Trucking & Logistics Group and a Partner in the Labor Law Practice Group at jvreeland@nullgenovaburns.com or (973) 535-7118, or, Harris S. Freier, Esq., a Partner in the Firm’s Employment Law and Appellate Practice Groups, at hfreier@nullgenovaburns.com or (973) 533-0777. Please also sign-up our free Labor & Employment Blog at www.labor-law-blog.com to keep up-to-date on the latest news and legal developments effecting your workforce.

A Troubling Decision for Employment Arbitration Agreements with Potentially Ambiguous Language and What it Means for Employers Going Forward

On April 5, 2016, in a rare rebuke of an employment arbitration agreement by a federal court, the United States District Court for the District of New Jersey (Hon. Madeline Cox Arleo, U.S.D.J.) held that it would not compel arbitration mandated by an employment agreement because the agreement at issue was too ambiguously drafted.

In Ranieri v. Banco Santander S.A., Civil Action No. 15-3740, Plaintiffs were former Mortgage Loan Officers with the Defendants in their New Jersey branches who brought a collective action claim for wage and hour violations under federal and state law.  The collective action was on behalf of all current and former employees of Defendants whose job duties included working as a mortgage loan officer and who were not paid overtime or minimum wage in the past three years.

At the start of their employment, Plaintiffs received an offer of employment which mandated that Plaintiffs execute “the enclosed Mortgage Retail Development Officer Agreement” (“MDO”) and all attached exhibits, on or before the first day of work.  The offer letter also attached a copy of the Mortgage Sales Commission Plan.  The MDO Agreement contained six sections, including an arbitration clause which prohibited class, collective, and representative actions against Defendants.  Both Plaintiffs signed the MDO agreements on the bottom of the final page under a bolded sentence that read: “I certify, by my signature below, that I have received a copy of the Mortgage Sales Commission Plan, which has been provided to me.”  The MDO Agreement contained a Pennsylvania choice of law provision.

While the Court acknowledged that ordinarily a party’s signature on an agreement implies agreement to the entire contract, here the Court found that the language in the MDO Agreement was ambiguous, specifically the sentence above the signature line.  The Court found that the purpose of the signatures was too unclear: either the Plaintiffs could memorialize only that they received the Mortgage Sales Commission Plan or that they agreed to all of the terms of the MDO Agreement and that they were confirming receipt of the Mortgage Sales Commission Plan.  Due to the ability to logically construe the agreement in more than one way, the Court held that it would not compel arbitration because the intent of the parties could not be determined on the pleadings alone, and because the ambiguous language in the MDO Agreement should be construed against the drafters, the Defendants.  Defendants’ motion to compel arbitration was denied without prejudice and the Court ordered discovery on the question of arbitrability.

The Court’s decision is important because federal courts have traditionally viewed employment arbitration agreements very favorably based upon the Federal Arbitration Act and significant U.S. Supreme Court precedent.  Such agreements have also become more widespread.  Employers with arbitration agreements should have these agreements regularly reviewed by counsel, as the law is in a constant state of flux regarding the effectiveness of arbitration agreements as to state claims and the prohibitions on class claims that any good arbitration agreement contains.  Carefully drafted arbitration agreements are more likely to be enforced.  Note that beyond having employment counsel review arbitration agreements, employers should also discuss the need for such agreements to start with.  Employers often mistake employment arbitration agreements as a panacea to liability from claims by current and former employees, however, legal fees and discovery are often not significantly reduced and with appeal options severely limited, a bad decision by an arbitrator can be disastrous for an employer.  Instead, arbitration agreements are often most useful in industries and for employers who face significant potential wage and hour class and collective action exposure.  Careful consultation with an employment attorney is critical both in deciding whether to use employment arbitration agreements and if the decision is made to use such agreements, how to make sure that they remain enforceable in a constantly changing legal landscape.

For more information regarding employment arbitration agreements, please contact Harris S. Freier, Esq., a Partner in the firm’s Employment Law and Appellate Practice Groups, at hfreier@nullgenovaburns.com or 973-533-0777.

U.S. Supreme Court alert: American Express Co. v. Italian Colors Restaurant

Prior to its summer recess, the U.S. Supreme Court issued another decision concerning class arbitration which has implications for unionized and non-unionized employers with agreements to arbitrate workplace disputes.

In American Express Co. v. Italian Colors Restaurant, the Supreme Court held that the Federal Arbitration Act (FAA) does not permit courts to invalidate a contractual waiver of class arbitration simply because the plaintiffs’ cost of individually arbitrating their claims against the company exceeds their potential recovery. The Supreme Court reaffirmed its opinions in Stolt-Neilsen S.A. v. AnimalFeeds Inter. Corp., which held a company may not be compelled to submit to class arbitration without a contractual basis for doing so, and AT&T Mobility LLC v. Concepcion, which held the FAA preempts state laws that prohibit contracts from disallowing class arbitration.  

The plaintiffs in American Express were merchants who accepted American Express credit cards at their stores and restaurants. Their agreement with American Express contained a clause that required all disputes to be resolved through binding arbitration, and provided that “[t]here shall be no right or authority for any claims to be arbitrated on a class action basis.”

The merchants brought a class action suit against American Express alleging violations of various antitrust laws. American Express moved to compel individual arbitration pursuant to the clauses in its agreements with the merchants. The merchants certified to the trial court that the amount necessary to prove the antitrust claims could exceed one million dollars, whereas the maximum potential recovery for an individual was only $38,549. The trial court was not persuaded, and dismissed the merchants’ lawsuit pursuant to the class waiver provision. However, the Second Circuit Court of Appeals reversed, holding that because the merchants had shown they would incur “prohibitive costs if compelled to arbitrate under the class action waiver,” the waiver was unenforceable and class arbitration could proceed.

American Express appealed to the Supreme Court. The merchants argued there was a judge-made exception to the FAA, which allows courts to invalidate agreements that prevent the “effective vindication” of a federal statutory right — here, the fact that the cost of litigating the antitrust claims individually would be more than any recovery prevented the vindication of their rights. The Court rejected this argument, stating “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” In other words, the cost did not prevent the merchants from pursuing their antitrust claims, it simply made litigating the matter not worth their while financially. The Supreme Court ultimately held that arbitration agreements providing for a waiver of class arbitration may be enforced regardless of whether it is too expensive for plaintiffs to pursue their claims individually given the potential maximum recovery.

In light of recent Supreme Court decisions upholding class arbitration waiver provisions, employers should consider incorporating class waivers in employment agreements. However, particularly in light of the specificity required by courts and unresolved case law concerning class waivers on appeal from the National Labor Relations Board, employers should always confer with counsel when incorporating class waiver dispute resolution language in employment agreements to understand the risks and benefits of these provisions.

For more information on the implications of the American Express decision and preparing and implementing lawful class waiver provisions, please contact James J. McGovern, III, Esq., jmcgovern@nullgenovaburns.com, or Douglas J. Klein, Esq., dklein@nullgenovaburns.com, in the Labor Law Practice Group.