Labor & Employment Newsletter

Arbitration provisions in employment contracts are not unusual. So when GrubHub, a fast-food delivery service, was sued by drivers for violating wage laws it filed a motion to enforce the arbitration clause in its service contracts with the drivers they say are independent contractors. The drivers, however, did not take the arbitration “to go” order sheepishly, but instead have responded that the arbitration provision does not apply to them and the matter should remain in court. The drivers’ initial argument is that because they are in the transportation business they are exempt from arbitration. Alternatively, the drivers contend that the court should make a preliminary ruling on their independent contractor classification before sending the case to arbitration. The case of Wallace v. GrubHub out of the Northern District of Illinois should result in a significant ruling that will have ripple effects on other arbitration-enforcement cases.

Background

GrubHub is an online and mobile food-ordering company. Customers place food orders through the GrubHub website or app, which is transmitted to the restaurants who would use their own delivery drivers if they have such employees or direct contracts for delivery. If the particular restaurant did not employ their own delivery personnel, GrubHub has independent delivery drivers (whether they are employees or independent contractors is a point of debate) who make the food-order delivery to the customers.

Plaintiffs were drivers who signed the delivery service provider contract. They brought their lawsuit alleging wage violations under both federal and state law because they were misclassified as independent contractors rather than actual employees, and the expenses required of them by GrubHub caused their hourly pay to fall below minimum wage. Fifty-four GrubHub drivers have opted into the class thus far.

GrubHub is defending other similar cases across the country. One such case, Souran v. GrubHub, involves a class of over 7,600 drivers that is back in Illinois federal district court after the Supreme Court ruled that the class action waivers signed by the drivers are enforceable.

It Goes to Arbitration, Right?

As expected, GrubHub contended in its motion that the signed contract contained an arbitration provision that was enforceable. The arbitration clause included a class action waiver and set out that “only the arbitrator” would have the exclusive authority to resolve any dispute related to the interpretation, enforceability, or formation of the arbitration provision. Further, beginning in July 2015, the contracts provided the right to opt out of the arbitration entirely by sending written notice within 30 days of acceptance.

There has been a long-standing principle for federal courts to enforce arbitration provisions pursuant to the Federal Arbitration Act (FAA), most recently illustrated by the Supreme Court’s ruling in Epic Sys. Corp. v. Lewis. According to GrubHub, because (1) there was a valid agreement to arbitrate and (2) the agreement covered the dispute, the arbitration provision needed to be enforced. GrubHub emphasized that any doubts concerning the scope of arbitral issues should be resolved in favor of arbitration, and that the agreement left it to the arbitrator to decide the “gateway” issues rather than the court.

GrubHub seeks to have the court action dismissed and each of the 54 plaintiffs sent to individual arbitrations.

Not so Fast

The driver plaintiffs seem to face an uphill climb, but their opposition brief pressed the point that their dispute should not be subject to arbitration based on the transportation worker exemption. The exemption, found in 9 U.S.C. §1, removes from the FAA’s coverage all contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. To qualify, the individual plaintiff needs to show (1) work for a business pursuant to a contract for employment and (2) be a transportation worker who is engaged in interstate commerce. Even though the drivers do not actually cross state lines, they are still engaged in interstate commerce because they are involved in the “flow” of interstate commerce based on the goods used, according to the drivers.

Once the drivers are exempt from the FAA, the GrubHub contract does not provide for any state law to enforce arbitration. Per the drivers, the vast majority of states addressing arbitration clauses containing class action waivers have found them to be unenforceable.

Employees or Independent Contractors – Who Decides?

GrubHub cited several cases in support of its position that the decision on whether a plaintiff is an employee or independent contractor was for the arbitrator to determine. The drivers’ opposition highlighted the recent First Circuit case of Oliveira v. New Prime, Inc., affirming that independent contractor agreements were actually employment contracts subject to the transportation worker exemption. Based on this guidance, according to the drivers, the court would need to decide whether the drivers were employees before deciding that they are exempt from arbitration. The Oliveira case is before the Supreme Court now, and a ruling is expected this year.

Alternatively, according to the drivers, the approach of the Ninth Circuit in the 2016 case of Van Dusen v. Swift Tranpo. could be invoked where the court made the threshold determination on whether the plaintiffs were employees or independent contractors to determine if the transportation exemption applied. In the drivers’ eyes, under either approach the court should deny GrubHub’s arbitration motion.

The drivers’ opposition vigorously argued that the drivers were in fact employees of GrubHub, not independent contractors, based on factors such as GrubHub being in the food delivery service, having drivers work on scheduled shifts when they must remain available, and being subject to termination if they do not respond to dispatchers.

Pay Attention to the Ruling

The district judge’s ruling on the motion will be significant and certainly one to keep an eye on. An arbitration provision signed by employees is generally enforced, but if the drivers are able to overcome that general presumption based on the transportation exemption and their related arguments, it will be a noteworthy decision that is certain to be raised in future cases with such arbitration clauses. The related case of Oliveira v. New Prime, Inc. awaits the Supreme Court’s opinion on whether independent contractor agreements constitute employment contracts that are subject to the transportation worker exemption -- which is another important ruling on this topic. Employers should review their arbitration clauses carefully, take note of how their industry situation (transportation or otherwise) may impact enforcement, and recognize that their arbitration agreements may not always be infallible.