Pig or Princess? Arbitration Agreement will not cover official pre-employment relationship

INDEPENDENT CONTRACTOR STATUS:  THE POWER AND IMPOTENCE OF LABELS

An Independent contractor by any other name is still an independent contractor, at least when interpreting an arbitration agreement.  (Holick v. Cellular Sales of New York, LLC, September 22, 2015, Wesley, R.).

The Second Circuit Court of Appeals has ruled that Cellular Sales could not compel persons it labeled as “independent contractors” to arbitrate their employee claims based on an arbitration agreement those same persons signed when becoming “re-labeled” as employees.  Cellular Sales wanted its arbitration agreement to be applied retroactively to claims arising before the Plaintiffs signed the employment arbitration document.

The two Cellular Sales class action “employees” were originally persons who had their own contracting companies, sold their companies to Cellular Sales, then worked as “independent contractors” for Cellular Sales as part of the sales agreements.  Later, Cellular Sales changed course, and relabeled the workers as employees.  When the newly labeled employees sued Cellular Sales,  Cellular Sales argued the arbitration agreement covered all aspects of the business relationship, including any claims arising during the time the employees were labeled as “independent contractors.”

THE MISAPPLIED “INDEPENDENT CONTRACTOR” LABEL IS STILL EVIDENCE OF THE PARTIES’ INTENT TO ARBITRATE.

The Second Circuit held that the contractual intent of the parties concerning the scope of the arbitration agreement was the correct question, not whether the “independent contractors” were in truth employees at the time of the first “sales” agreement.  Stated differently, if the parties intended the pig to be a princess, the Court would enforce that illusion as to the procedural matter of whether the case would be resolved by arbitrator or judge.

AGGRESSIVE FEDERAL AND CALIFORNIA LAWS ATTACK THE PRACTICE OF MISLABELING EMPLOYEES AS “INDEPENDENT CONTRACTORS.”

There is widespread abuse by employers mislabeling employees as independent contractors.  [For a summary of the IRS “20 Factor Test,” see: Independent Contractor or Employee?] That abuse has produced tough laws penalizing employers seeking to ride the backs of their employees to the holy land of profits.  Attorneys in California particularly are looking to this area of law to support recovery of penalties for the State of California and their individual clients through the “Private Attorney General Act” or “PAGA.”  See California Labor Code 2698 – 2699.5.

Under California Labor Code Section 226.8, it is unlawful for any person or employer to engage in the “willful misclassification” of an individual as an independent contractor. “Willful misclassification” is defined as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” Labor Code § 226.8(i)(4).

In addition to the act of misclassification, each time a misclassified worker is charged a fee or has his/her pay reduced as a result of the misclassification, there is a new violation of Section 226.8. How Employers Will Be Affected Penalties range from $5,000 to $15,000 per violation for isolated violations. Where there is a pattern or practice of violations, the penalty range increases—$10,000 to $25,000 per violation.

Under Labor Code Section 2753, paid advisors (excluding attorneys and employees of the company) who “knowingly advise” employers to misclassify workers are jointly and severally liable for any penalties imposed on the employer as a result of the misclassification.

In addition to the new costly monetary penalties, employers who violate the new law are required to post a “prominent” notice on their public website stating, among other things, that they have “committed a serious violation of the law” by willfully misclassifying employees, and directing any other employees who feel they have been misclassified to contact the Labor and Workforce Development Agency.

ARBITRATION AGREEMENTS SHOULD BE CHALLENGED AS NOT APPLYING TO THE PERIOD OF THE MISCLASSIFICATION.

The Holick v. Cellular Cells case has an interesting subtext:   the motivations behind Cellular Sales when it voluntarily switched from treating its labeled “independent contractors” to “employees.”  It did so, I am convinced, because it feared being the eventual target of the aggressive federal effort to end misclassification under the FLSA, with all the resulting penalties and tax surcharges.  This trend is accelerating in California which has its own very broad protection of employees misclassified as “independent contractors.” Unscrupulous employers will seek to divert their previous illegal classification from trial court exposure by drafting private employment arbitration agreements.  The argument can be made for these employees that the intent to arbitrate did not include the time the employees were mislabeled as “independent contractors.”

 

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