Court Of Appeal Holds Arbitration Agreement Covering Independent Contractors To The Same Standards Applied To Arbitration Agreements Covering Employees

By Christopher S. Andre and Ronald W. Novotny

In Karena Wherry v. Award, Inc., Division Three of the Fourth Appellate District of the California Court of appeal held that the standards applicable to arbitration agreements between an employee and an employer apply also to arbitration agreements between an independent contractor and the contracting “employer.” 

The plaintiffs entered into an Independent Contractor Agreement with Award, Inc., to perform real estate sales.  That Independent Contractor Agreement required, among other things, that disputes arising out of the Independent Contractor Agreement be resolved by binding arbitration by the California Association of REALTORS (“CAR”) and incorporated by reference the Bylaws of CAR.

After the relationship between plaintiffs and Award, Inc., terminated approximately one year later, plaintiffs filed suit alleging Award, Inc., and other co-defendants engaged in gender discrimination, sexual harassment, and retaliation in violation of the California Fair Employment Housing Act (“FEHA”).

The trial court granted the defendants’ petition to compel the plaintiffs to arbitrate their claims.  The plaintiffs then filed with the Court of Appeal a petition for writ of mandate requiring the trial court to vacate its order compelling arbitration.

The Court of Appeal granted that petition, holding that the arbitration provisions of the Independent Contractor Agreement were procedurally and substantively “unconscionable” and therefore unenforceable. The Court of Appeal concluded the arbitration provisions of the Independent Contractor Agreement were procedurally unconscionable because the Independent Contractor Agreement was presented on a “take it or leave it basis” (as many contracts are), and the plaintiffs were reportedly not provided an opportunity to ask questions or to have it reviewed by counsel.   The Court of Appeal held also that the arbitration provisions of the Independent Contractor Agreement were substantively unconscionable because some of those terms were inconsistent with the requirements the California Supreme Court held in Armendariz v. Foundation Health Psychcare Services, Inc., must be satisfied before a claim for alleged violation of the FEHA by an employer can be made subject to an employment arbitration agreement.

Without any analysis or explanation, the Court of Appeal states “[t]hat plaintiffs are independent contractors and not employees makes no difference in this context.  The contract by which they were to work for defendants contained a mandatory arbitration provision.”  We believe this represents a remarkable expansion of the jurisprudence heretofore applicable only to arbitration agreements between employees and employers and, potentially, a remarkable expansion of the FEHA and its jurisprudence to independent contractors.

The Court of Appeal’s decision in this case presents two important take-aways:

First, businesses should consider consulting competent counsel to determine whether an arbitration agreement covering independent contractors would be enforceable under the Court of Appeal’s decision in this case. 

Second, businesses with arbitration agreements, whether applicable to employees or to independent contractors or both, should bear in mind the risks associated with incorporating by reference arbitration provisions or arbitration procedures published by some other person or entity and not presume that such arbitration provisions incorporated by reference will necessarily withstand scrutiny by California courts.  In this case, the arbitration provisions the Court of Appeal found offending were contained in the Bylaws of CAR incorporated by reference into the Independent Contractor Agreement between the plaintiffs and Award, Inc. 

Court of Appeal Decision Reiterates That Courts Will Look Beyond The Parties' Agreement When Determining Whether A Worker Is An Independent Contractor Or An Employee

By Yona Conzevoy and Christopher S. Andre

In Arzate v. Bridge Terminal Transport, Inc., a wage and hour class action case brought by members of the Teamsters Union who own and operate their own trucks against defendant Bridge Terminal Transport, Inc., a common carrier engaged in the business of transportation, the California Court of Appeal reversed the trial court’s grant of summary judgment, holding that whether the plaintiffs were employees of defendant, and not independent contractors, was a triable issue of fact. 

Defendant Bridge Terminal Transport, Inc. arranges for the transportation of its customers’ cargo between ports or terminals and the customers’ facilities.  Plaintiffs leased their trucks to defendant to be used for hauling cargo for defendant.  According to the signed lease agreements, the parties “intended to create a relationship of independent contractor, not employer-employee,” and plaintiffs had control over the “method and means by which the motor vehicle equipment is operated.”  However, the Collective Bargaining Agreement the truck owners were subject to provided that they “shall work exclusively for their Employer and for no other interests,” and the terms of the Collective Bargaining Agreement “shall have precedence” where they conflict with the lease agreements.

The Court of Appeal held that defendant could not establish as a matter of law that plaintiffs were independent contractors, based on S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341.  According to S. G. Borello, there are several factors that must be considered in determining the existence of an employment relationship; while the employer’s right to control the work is the most significant, other factors that must be taken into consideration include “(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties belief they are creating the relationship of employer-employee.” (Id. at 351.)

The Court of Appeal found that the defendant could not establish that plaintiffs did not have independent contractor status just because defendant did not control the manner and means by which plaintiffs hauled loads.  There were multiple factors that weighed against calling plaintiffs independent contractors: (1) Defendant executed the collective bargaining agreement with plaintiffs’ union, which represented the owner-operators of trucks in the role of “employees’ of the company; (2) Defendant issued W-2 forms to plaintiffs, withheld taxes, and offered health plan benefits that included paying 70 percent of the cost; (3) Defendant paid hourly rates for some parts of plaintiffs’ work day, such as waiting time, drivers’ meetings; (4) Defendant could terminate the lease agreements on 24 hours’ notice; (5) the work plaintiffs do (transportation of property) is part of the regular business of defendant.

This case serves as an important reminder that California courts will look beyond parties' agreements when evaluating whether a person is an "employee" or an "independent contractor" or purposes of determining whether the numerous provisons of the Labor Code applicable to employees apply.  Typically, the more control a business exercises over how work is done, the more likely it is a California court will find the relationship to be an "employment" relationship and therefore subject to the numerous requirements of the Labor Code and of the Industrial Welfare Commission wage order applicable to the particular industry or occupation.  The consequences of misclassifying a worker as an independent contractor who should have been classified as a non-exempt hourly employee can be substantial.  For example, if, because of misclassifying a worker as an independent contractor, the business failed to provide the worker with required meal and rest periods, failed to pay the worker for all hours worked, failed to pay premium pay for overtime hours, and/or failed to provide properly itemized wage statements, the business could become liable for substantial damages for unpaid wages, for various civil penalties, and for attorney's fees.