Is an independent food distributor exempt from an arbitration agreement under the interstate transportation worker exemption in the Federal Arbitration Act (FAA)? That was the question that the U.S. Supreme Court addressed in its April 12, 2024 opinion involving a distributor of products manufactured by a baked goods company. In its opinion, the Supreme Court made it clear that a worker need not provide services to a company in the transportation industry to be considered an interstate transportation worker; to the contrary, it ruled that an individual can provide services to a company in an industry other than transportation and still invoke the interstate transportation worker exemption. But that only answered the threshold question about the scope of the exemption, leaving a very fact-specific inquiry for lower courts to address: in what activities must the worker be engaged in order to be considered an interstate transportation worker under the FAA, and to what extent must the worker be involved in such activities? The Supreme Court’s test for the availability of the exemption, explained below, will create years of litigation in the lower courts and a great deal of uncertainty. Fortunately, for companies that face these issues, such uncertainty can be averted by drafting arbitration agreements that rely on state arbitration laws in addition to the FAA. Effective and well-drafted arbitration agreements are one of the tools businesses have utilized to minimize independent contractor misclassification exposure from class actions. They remain an essential part of a compliance process such as IC Diagnostics (TM), which is used by an increasing number of savvy companies to manage their IC relationships.
In the Courts (5 cases)
SUPREME COURT DECISION ON FAA ARBITRATION EXEMPTION CREATES UNCERTAINTY FOR BUSINESSES USING IC’S WHOSE ACTIVITIES INCLUDE DRIVING. The U.S. Supreme Court has decided that a transportation worker need not work for a company in the transportation industry to be exempt from arbitration under Section 1 of the FAA. Section 1 of the FAA, sometimes referred to as the “interstate transportation worker exemption,” exempts “contracts of employment of…any other class of workers engaged in foreign or interstate commerce.” Two distributors for Flowers Foods, Inc., a nationwide producer and marketer of baked goods, brought a putative class action claiming that Flowers and an affiliate had misclassified them as independent contractors instead of employees. The lawsuit alleges the plaintiffs were underpaid in violation of the Fair Labor Standards Act and state law by virtue of defendants’ alleged actions in making unlawful deductions from their wages, failing to pay overtime compensation, and requiring the distributors to pay for distribution rights and operating expenses. The two distributors owned the rights in certain parts of Connecticut to distribute the company’s products to store accounts and their own customers. The company made a motion to compel arbitration because the agreements with the distributors contained an arbitration clause. Although the distributors argued that they fell within the interstate transportation worker exemption to the FAA and therefore could not be compelled to arbitrate because a part of their activities included driving, the district court dismissed the case in favor of arbitration. The U.S. Court of Appeals for the Second Circuit affirmed the decision on the ground that the two distributors were in the baking industry, not the transportation industry, and therefore did not qualify for the arbitration exemption.
The Supreme Court vacated the judgment of the Second Circuit. It concluded that there is no requirement that a transportation worker must only work for a company in the transportation industry to be exempt under Section 1 of the FAA. It stated that the exemption for such workers depends on “what they do, not for whom they do it.” The Court continued: “a transportation worker is one who is “actively” “‘engaged in transportation’ of . . . goods across borders via the channels of foreign or interstate commerce.” The Court tried to explain its test by stating that an exempt worker “must at least play a direct and ‘necessary role in the free flow of goods’ across borders.” What does that mean? Lawyers will debate for years the meanings of the words “actively,” “across borders,” and “necessary role,” and slight differences in facts may well result in different determinations for similar types of workers who drive, transport, or handle goods that originate from out of state. Although the Court expressly stated that it was not reaching the merits of the Section 1 exemption as applied to the facts in this case, there are compelling arguments that these types of distributors, who operate on a direct store door (DSD) basis, do not generally transport goods in interstate commerce and do not actively engage in transportation activities. Rather, driving is incidental to their primary responsibilities – to sell goods to stores and service those stores’ needs for such products. Bissonnette v. LePage Bakeries Park St. LLC, No. 23-51 (Sup. Ct. Apr. 12, 2024).
Shortly after this decision was issued, the publisher of this blog was quoted at length in an April 15, 2024 article entitled “Arbitration Carveout’s Scope to Turn on Where Line is Drawn” by reporter Jon Steingart in Law360 Employment Authority. Our publisher noted that “the biggest issue with the high court’s decision is that its precedent tees up more litigation by using terms without defining them.” He also explained: “[A] court finding that someone is exempt from the FAA doesn’t mean their arbitration agreement is unenforceable….In any event, state arbitration laws continue to provide an alternative basis for a court to compel arbitration of employment and independent contractor claims….As is often the case in contract law, an agreement’s wording matters a lot….Attorneys should carefully draft an arbitration agreement, so they don’t unintentionally close the door to enforcement under state law, such as by including a statement that the arbitration provisions ‘will be governed solely by the Federal Arbitration Act.’”
MICHIGAN MARIJUANA TRANSPORTATION COMPANY UNABLE TO DISMISS DRIVER’S FLSA LAWSUIT FOR IC MISCLASSIFICATION. A federal district court in Michigan has denied a marijuana transportation company’s motion to dismiss an independent contractor misclassification lawsuit brought by a driver under the FLSA alleging that they were denied overtime pay. The company, which transports marijuana for dispensaries and growers, had argued that the drivers were exempted from the overtime provisions of the FLSA under that law’s exemption covering a motor carrier’s employees who are engaged in duties that affect the safety of vehicles operated in interstate commerce. Although the driver asserted that he drove to and from marijuana facilities within Michigan and could not legally cross state lines due to other states’ criminalization of marijuana production and sale, he also alleged that he and other drivers were “directly and regularly engaged in interstate commerce when they transported items on the interstate highways, purchased fuel, and transacted business by electronic financial transaction devices.” In denying the company’s motion to dismiss, the Court concluded that “the interstate commerce requirements of the MCA exemption are not necessarily met by establishing that an employee is [merely] ‘engaged in commerce’ within the meaning of the FLSA,” and that “the factual allegations do not support the proposition that [the] drivers crossed state lines.” Waxler v. All Green Transport LLC, No. 1:23-cv-00897 (W.D. Mich. Apr. 15, 2024).
FORMER CEO OF TITLE EXAMINING COMPANY REQUIRED TO STAND TRIAL IN LAWSUIT FILED BY U.S. LABOR DEPARTMENT FOR IC MISCLASSIFICATION. The U.S. Department of Labor sued a title examining company that provided land services in the oil and gas industry and its former CEO for violations of the FLSA by failing to pay overtime to title abstractors and title examiners, referred to in the industry as “landmen.” A Pennsylvania federal district court denied competing motions for summary judgment and scheduled the case for trial. The DOL alleged in its Third Amended Complaint that the company and its CEO misclassified landmen as independent contractors instead of employees. The DOL contends that the landmen were responsible for researching land deeds to determine ownership of mineral rights, writing and reviewing reports, and other related tasks. According to the pleadings, certain workers were engaged to work for over 40 hours a week and did not receive a premium for such overtime hours, allegedly in violation of the FLSA. Additionally, the Complaint claimed that the CEO’s role in the alleged misclassification was “his personal, active control and management of the entire company, regulation of the employment of Landmen and contributions to the policy of misclassifying workers such that the misclassification occurred, was willful, and he carries personal liability as an FLSA ‘employer’….” After more than six years of contested litigation, the company filed for bankruptcy and entered into a $43 million consent judgment with the DOL. In denying the motions for summary judgment by the former CEO and DOL, the federal court concluded that a genuine issue of material fact existed as to whether the landmen were independent contractors or employees. It reasoned that while the DOL tried to “paint a picture of an organization heavily and persistently supervised by the top (specifically by [the CEO]” with a highly integrated workforce of long-term employees, the CEO “puts forth a contrasting image of an amalgamation of temporary, project-by-project contractors” who were without “intimate control of the means and manner” by which the services were provided. The court also denied the summary judgment motion as to whether the individual CEO was an employer under the FLSA, Court concluding that there was a question of whether the CEO was “a ‘mere supervisor’ simply residing at the top of a corporate hierarchy or was instead a full-blown hands-on ‘employer’ of the Landmen.” Su v. Gaudin, No. 2:15-cv-01094 (W.D. Pa. Apr. 23, 2024).
FLORIDA FURNITURE DELIVERY COMPANY SETTLES CLASS ACTION LAWSUIT ALLEGING IC MISCLASSIFICATION OF DRIVERS. Homedeliverylink Inc. has settled a class action lawsuit alleging independent contractor misclassification brought by a delivery driver in federal court in Florida. The company engages drivers to transport retail merchandise from furniture store businesses to residential homes. The driver who brought the lawsuit on behalf of himself and other similarly situated delivery drivers alleged in the class action complaint that the company violated wage and hour provisions of the FLSA, the Florida Constitution, the Florida Minimum Wage Act, and the Florida Unfair and Deceptive Trade Practices Act due to its alleged misclassification of the drivers as independent contractors and not employees. According to the class action complaint, the company set the drivers’ rates of service by the drivers; required the drivers to perform transportation services exclusively for the company, unless it did not have sufficient work for the driver; mandated that the drivers purchase from the company equipment and fuel, tolls, petty cash advances, insurance, workers’ compensation premiums, professional attire, and waste disposal; obligated the drivers to place company signs on the vehicles and wear company uniforms; and required attendance at mandatory meetings to receive instructions on how the drivers are to perform their jobs. The terms of the settlement have not yet been disclosed. German v. HomeDeliveryLink Inc., No. 8:24-cv-00491 (M.D. Fla. Apr. 10, 2024).
Regulatory and Administrative Initiatives (1 matter)
FTC’S NON-COMPETE RULE WILL APPLY TO INDEPENDENT CONTRACTORS, UNLESS ENJOINED. The Federal Trade Commission’s newly issued Non-Compete Clause Rule applies to independent contractors as well as employees. On April 23, 2024, the FTC announced that it had adopted the Rule, which provides that it is an unfair method of competition – and therefore a violation of the FTC Act – for companies to, among other things, enter into non-compete clauses with workers on or after the Rule’s effective date of September 4, 2024. The Rule defines “worker” as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.” (Emphasis added.) Unless the Rule is struck down by the courts prior to the effective date, non-compete agreements entered into before the effective date will be unenforceable, except as to “senior executives,” and after the effective date, companies will be prohibited from entering into non-competes with all workers and be required to notify workers that existing non-competes are unenforceable.
