By:   Lizbeth V. West, Esq.

There is a relatively long list of California cases that stand for the proposition that certain types of employment disputes are not subject to arbitration. On October 17, 2012, the Second District Court of Appeal’s decision in Elijahjuan et al v. Superior Court of LA County (Mike Campbell & Associates, Ltd., et al., as real parties in interest – referred to herein as “Defendants”) added to that list disputes between parties as to whether or not workers are in fact employees rather than independent contractors.

Plaintiffs were owner-operator truck drivers who made deliveries to defendants’ customers. Plaintiffs sued Defendants, claiming their contracts with Defendants, the "Broker/Carrier Agreement" or the "Transportation Agreement" (“Agreement”), incorrectly characterized Plaintiffs as independent contractors. The Agreement included extensive provisions regarding Plaintiffs’ compensation. Nevertheless, Plaintiffs claimed they were employees and were denied wage and hour benefits under the California Labor Code. The parties’ Agreement contained detailed dispute resolution provisions requiring the parties to submit their disputes to arbitration. The allegation that Plaintiffs’ were misclassified as independent contractors was underlying to every cause of action in the lawsuit.

Defendants filed a motion to compel arbitration pursuant to the arbitration provision in the parties’ Agreement. In opposition to the motion, Plaintiffs argued, among other things, that their claims of misclassification did not arise out of or require interpretation of the Agreement. Defendants countered that the Agreement "sets forth all of the terms and conditions of the business relationship between [Plaintiffs] and [Defendants] including [Plaintiffs’] ability to subcontract work and their ability to contract with other companies during the term of the Agreements." The trial court granted the motion to compel arbitration of all claims except for an alleged violation of the Unfair Business Practices Act. The trial court reasoned that the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.) applied, and that Plaintiffs were not exempt from arbitration under section 1 of the FAA, which exempts contracts of employment of transportation workers. (9 U.S.C. § 1.) The trial court concluded the exemption does not apply because Plaintiffs are independent contractors, and not employees.

Plaintiffs filed a writ of mandate and argued that their rights under the Labor Code are distinct from their contractual rights under the Agreement. The court of appeal found that the ultimate issue to be decided in the lawsuit was whether Defendants satisfied the requirements of the Labor Code, not how the parties described their relationship in the Agreement. According to the court of appeal, the parties’ own label does not control whether Plaintiffs are independent contractors. Thus the court of appeal held that the Agreement to arbitrate disputes concerning the application and interpretation of the Agreement did not include claims for wage and hour violations under the Labor Code in the lawsuit and ordered that a peremptory writ of mandate issue commanding the trial court to vacate its order compelling arbitration and issue a new order denying Defendants’ motion to compel arbitration.

Judge Grimes wrote a lengthy dissenting opinion that lays out compelling reasons why the majority’s decision was wrong. Judge Grimes analyzed the arbitration clause in the Agreement which specifically stated that the clause applied to any "dispute [that] arises with regard to . . . application or interpretation" of the Agreement.” The Agreement classified the "relationship of Carrier to Broker" as "that of an independent contractor." It also provided that the "Carrier shall not be subject to the direction, control or supervision of Broker[.] . . . Under no circumstances shall employees or agents of Carrier be deemed employees . . . of Broker." The Agreement also had extensive provisions for the calculation of Plaintiffs’ compensation as carriers. According to Judge Grimes, since the complaint alleges that Plaintiffs were misclassified as independent contractors and were entitled to protections conferred upon employees by the Labor Code, notwithstanding the representations made in the Agreement, it follows that the resolution of Plaintiffs’ claims required an interpretation of the Agreement and an evaluation of the evidence to decide if the Agreement applies to set the terms of Plaintiffs’ compensation, or if the Agreement does not accurately describe the parties’ relationship and the Labor Code governs plaintiffs’ rightful compensation.

Judge Grimes said “in my view, the majority opinion amounts to a judicial rule barring arbitration of wage and hour claims under the Labor Code in any contract that purports to have been made with an independent contractor, even a contract affecting interstate commerce. The high court has held that neither statutory nor judicial rules may interfere with enforcement of the FAA, so in my view, we are without authority to vacate the order compelling arbitration on this basis.”

Lesson for Companies: First and foremost, do not enter into independent contractor relationships lightly. As previous posts on our blog have discussed, the misclassification of workers as independent contractors can have disastrous results on many different levels – claims for wage and hour violations under the Labor Code being just one. Secondly, if you are going to include an arbitration provision in your independent contractor agreements (or any other agreement for that matter), make certain to have the language reviewed by your legal counsel so that, to the extent possible, the arbitration provision includes language that makes clear that it will govern all disputes between the parties, including any dispute regarding a party’s compliance with statutory obligations.

The attorneys in Weintraub Tobin’s Labor and Employment Department are very experienced in drafting effective and enforceable arbitration agreements and in auditing independent contractor relationships and representing employers who get the classification wrong. Feel free to contact us.