A Tale of Two $100-Million Independent Contractor Misclassification Settlements

Yesterday, the first $100-million settlement of an independent contractor misclassification case suddenly became a $20-million deal, but on the same day a nine-figure settlement in another case took its place.

As reported in our blog post on April 22, 2016, Uber Technologies had reached a $100-million proposed settlement with about 385,000 drivers in California and Massachusetts; $84 million was guaranteed and another $16 million would be added if Uber went public and achieved a certain valuation within its first year after an initial public offering. But that settlement proposal was rejected by a federal district court judge on August 18, 2016, as we reported in our post that day, because the amount allocated to the drivers’ Private Attorneys General Act (PAGA) claim was regarded by the judge as inadequate.

Yesterday, Uber and a much smaller class of 13,600 drivers who had opted out of the arbitration provisions in the Uber driver agreement reached a proposed settlement in the same case for $20 million along with certain non-economic benefits to drivers. O’Connor v. Uber Technologies, Inc., No. 15-cv-262 (N.D. Cal. Mar. 11, 2019).  This seems like a rather large reduction, and it is, but the amount per class member rose exponentially.

But on the same day this former $100 million settlement was replaced by a lower amount, another $100 million IC misclassification settlement was reached between Swift Transportation Co. and approximately 20,000 owner-operator drivers who entered into independent contractor agreements with Swift. Van Dusen v. Swift Transportation Co., Inc., No. CV 10-899 (D. Ariz. Mar. 11, 2019).

The Swift lawsuit was commenced in the federal district court for Arizona over nine years ago.  The class action complaint claimed that the drivers were employees of Swift who had been misclassified as ICs and were paid below the federal minimum wage level when taking into account their lease payments and costs of maintaining their trucks and paying for fuel, tolls, and insurance. The lawsuit against Swift was brought under the Fair Labor Standards Act as well as state wage and contract laws.

Uber was able to trim the number of potential class members in the lawsuit from 385,000 to a small fraction of that number by including in an updated driver contract an arbitration clause with a class action waiver.  Drivers were given a set period of time to opt out of the arbitration provisions, but less then 4% of the original number of drivers in the class (only 13,600 drivers) did so.  The arbitration provision was was later challenged in court, but Uber was able to ultimately succeed in compelling arbitration on an individualized basis for all drivers other than the relatively small percentage who had opted out. Those drivers remained class members, and only that group is covered by the new $20 million settlement.

In stark contrast, Swift was unsuccessful in seeking to compel arbitration on an individualized basis under the arbitration provisions in the drivers’ IC agreements.  Swift’s arbitration clause was found unenforceable when it was held by a district court judge to be part of a “contract of employment” that is exempt from arbitration under the Federal Arbitration Act (FAA) and the Arizona Arbitration Act.  This court ruling eventually led Swift to agree to the proposed settlement, even though it has vigorously denied misclassifying any owner-operators.

Analysis and Takeaways

Few would have anticipated that there would ever be a second nine-figure settlement in an IC misclassification class action.  Nor would many have anticipated a few years ago that arbitration clauses would have such a major impact on the amount of the settlements in these types of cases.

But in the past few years, the law of arbitration has been evolving in a manner that few could predict with certainty.  In the past year alone, the U.S. Supreme Court has issued major decisions addressing arbitration clauses.

Last May, the Supreme Court decided Epic Systems Corp., which upheld mandatory arbitration agreements imposed by companies.  Uber used that decision to its advantage. And only two months ago the Supreme Court decided New Prime Inc. v. Oliveira, which held that the FAA’s exemption of “contracts of employment” applied not only to employees but also to independent contractors where the workers are involved in interstate transportation. The drivers in the Swift Transportation used that recent decision to their advantage.

While there are both pros and cons associated with arbitration clauses, most companies have concluded that the benefits usually outweigh the detriments, and more and more businesses have implemented arbitration clauses with class action waivers in their IC agreements.

But, merely having an arbitration clause with a class action waiver in an IC agreement is not a guarantee that a company will be able to forestall a class action in court by obtaining a court order compelling individual arbitrations.  Plaintiffs’ class action lawyers have been successful at times in obtaining court decisions that certain arbitration agreements are unenforceable – whether because of the FAA exemption, or because the arbitration clause is found to be unconscionable, or because it has been drafted ineffectively.

As we noted in our November 14, 2018 blog post entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in IC Agreements,” there are an abundance of issues that should be considered when creating or updating arbitration agreements in independent contractor agreements (or, for that matter, in employment agreements).

  • Does it require individual arbitrations and eliminate class arbitrations from the authority of the arbitrator?
  • Does the arbitration agreement cover third-party beneficiaries?
  • Does the arbitration clause’s choice of law select a state with a favorable arbitration law and an IC-friendly test?
  • Does the agreement avoid the types of unconscionability arguments that plaintiffs’ class action lawyers routinely advance to try to invalidate an arbitration clause?
  • Is the arbitration provision buried in the IC agreement or is it conspicuous?
  • Is the jury trial waiver drafted in a way that will likely withstand judicial scrutiny?
  • Is the provision that sets forth the authority of the arbitrator (sometimes referred to as the “delegation clause)” drafted in an effective and favorable manner?
  • Are there certain types of disputes that need to be carved out of an arbitration clause by virtue of state law?
  • Are there any disputes that are better suited for judicial resolution?
  • Has federal or state arbitration law changed since the last time the arbitration provision with class action waiver was drafted?
  • Should the arbitration agreement take into account any legislative bills being proposed in Congress or the state legislatures limiting or expanding arbitration?

While arbitration clauses with class action waivers are being increasingly deployed by companies, they are merely a procedural defense to IC misclassification lawsuits, and do not cover proceedings by regulatory and administrative agencies, which are not bound by arbitration agreements.  Substantive defenses to the merits of an IC misclassification claim are far more important.

For example, as we reported in our January and February 2019 news updates, federal appellate courts have ruled on the substantive merits that insurance agents and oilfield consultants were properly classified as ICs.

By elevating compliance with federal and state IC laws, companies can substantially lessen the likelihood of an IC misclassification lawsuit being filed in the first place.  And, if filed, an enhanced level of compliance not only increases the likelihood of a successful defense on the merits but also leads to a less costly settlement.

One way in which companies have sought to elevate their compliance with IC laws is by the use of a process such as IC Diagnostics™, which examines whether a group of workers being treated as ICs would pass the applicable tests for independent contractor status under governing state and federal laws.  Such a process then offers a number of practical, alternative solutions to enhance compliance with those laws. Those alternatives include restructuring, re-documenting, and re-implementing IC relationships in a customizable and sustainable manner consistent with a company’s existing business model.

Elements of this process can also be used to create a more effective defense of an IC misclassification class action.

Written by Richard Reibstein

Edited by Janet Barsky

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