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Courts Dent Gig Companies’ Shield Against `Existential’ Threat

Oct. 23, 2019, 10:04 AM

The mandatory arbitration contracts that have stopped drivers for app-based companies like Uber Technologies Inc. and GrubHub Inc. from claiming in court that they’re employees, and not independent contractors, may be on shaky ground thanks to a combination of high-level rulings.

The U.S. Supreme Court ruled this year that contractors as well as employees can be covered by an exemption for transportation workers in the federal law that requires the enforcement of arbitration pacts. At least one federal appeals court has ruled that drivers transporting passengers or delivering goods qualify for that exemption, as long as they’re involved in interstate commerce.

If app-based companies can’t stand on arbitration contracts to avoid drivers’ class actions, it could disrupt a fundamental labor strategy of the gig economy. Those lawsuits could be particularly potent in states like California, New Jersey, Massachusetts and Connecticut, which use a rigid three-part legal test that makes it difficult to classify workers as independent contractors. New Jersey labor auditors are investigating whether Uber and Lyft misclassified their drivers.

Potentially having to reclassify workers as employees is an “existential” threat for many app-based companies, said Micah Rowland, chief operating officer of Fountain, a recruiting and hiring platform that works with gig economy firms. The increased costs from employing rather than contracting labor could prevent them from ever being profitable, he said.

Lyft Inc. and Uber’s expenses per driver, for example, could spike by more than 20% if they have to reclassify them as employees, according to a Bloomberg Intelligence analysis. Employee are entitled to overtime, workers compensation and minimum wage, among other benefits.

Whether drivers can avoid being forced into arbitration, though, may depend on whether courts decide dropping off passengers at the airport or delivering meals from local restaurants count as being engaged in interstate commerce—a question very much up in the air.

An Uber spokeswoman declined to comment. Representatives and lawyers for Lyft, DoorDash Inc., Postmates Inc., and GrubHub didn’t respond to requests for comment.

Uber Arbitration

Uber’s employment litigation strategy has shown how powerful arbitration agreements can be in the gig economy.

For example, a misclassification lawsuit brought on behalf of nearly 390,000 Uber drivers shrunk significantly because so many had signed arbitration agreements. The company eventually agreed to pay $20 million to settle the claims of 5,600 drivers.

Uber has convinced courts to let arbitrators decide whether nearly two dozen lawsuits belong in arbitration since 2016, according to a court filing from the company. That strategy has carried its own price tag—Uber will pay at least $146 million to a “large majority” of the more than 60,000 drivers who filed arbitration claims for misclassification—but the company hasn’t had to make its drivers employees.

The Supreme Court’s ruling in New Prime v. Oliveira, however, has put the validity of drivers’ arbitration pacts in doubt. That decision took away the argument that workers labeled as independent contractors can’t benefit from the Federal Arbitration Act exception for transportation workers engaged in interstate commerce. It also guaranteed that courts rather than arbitrators will decide whether the exception in that law applies to the workers in question.

“If courts refuse to enforce arbitration agreements for gig economy drivers, then those drivers will be able to resolve their claims in court,” said Charlotte Garden, a law professor at Seattle University who has written on the impact of arbitration on workplace law in the gig economy. “This means a public process that could at least result in a precedential decision from an appellate court.”

Interstate Commerce

In a rare defeat, Uber failed to convince a court to move a misclassification lawsuit into arbitration last month. The U.S. Court of Appeals for the Third Circuit rejected the company’s argument that the FAA transportation worker exemption only applies to workers involved in moving goods, not passengers.

The appeals court sent the case back to New Jersey federal court to decide whether the drivers were engaged in interstate commerce. That same issue is a crucial question in other pending cases, including those against Lyft in federal court in Massachusetts and GrubHub in the Seventh Circuit.

The drivers would almost certainly be engaged in interstate commerce in the constitutional sense, under the Supreme Court’s precedents on the Commerce Clause, according to constitutional scholars. The drivers’ work substantially affects interstate commerce, and they employ both the tools of interstate commerce, such as cars and online apps, and the channels of interstate commerce, such as roads and the internet, scholars said.

But the definition of interstate commerce for gig economy drivers doesn’t turn on Commerce Clause jurisprudence. It depends instead on how the FAA’s exception for transportation workers is interpreted.

The Supreme Court spoke on the exception in its 2001 ruling in Circuit City v. Adams, indicating that it applies to transportation workers involved in the flow of interstate commerce.

“The drivers don’t have to cross state lines,” said Shannon Liss-Riordan, the attorney for many of the drivers who have sued gig economy companies for misclassification. “The issue is whether what they’re transporting crosses state lines.”

Amazon.com Inc. delivery drivers represented by Liss-Riordan recently defeated attempts to force their lawsuits into arbitration based on agreements they were required to sign. Two federal courts said the drivers were subject to the FAA exemption because they delivered packages in the flow of interstate commerce, even if it was just the last mile of that journey.

Crossing Lines, In the Flow

Still, the Uber drivers in the New Jersey case don’t need to get into complicated questions about what it means to be in the flow of interstate commerce, according to their lawyer, Justin Swidler.

With New York City, Philadelphia, and three major airports very close to New Jersey’s borders, a majority of the Uber drivers he represents frequently cross state lines while ferrying passengers, Swidler said.

The flow of interstate commerce should include transporting passengers who are journeying from one state to another, which would make drivers who take passengers to an airport or a train station covered by the exemption, said Jennifer Bennett, an attorney with Public Justice, the left-leaning advocacy group that prevailed in the New Prime case.

There’s no clear law, however, on whether a driver transporting passengers would have to travel between states to be engaged in interstate commerce under the FAA exemption, said Martin Malin, a law professor and co-director of the Institute for Law and the Workplace at Chicago-Kent College of Law.

“There’s a lot of fine lines that need to be worked out,” said Malin, who’s also an arbitrator.

The Wisdom of Slicing and Dicing

The Supreme Court’s Circuit City decision held that the exemption doesn’t apply to workers beyond those involved in the transportation industry, while giving little guidance on what constitutes interstate commerce, said Lise Gelernter, a member of the teaching faculty at the University of Buffalo School of Law.

Interpreting “engaged in interstate commerce” too narrowly could mean that one driver who only travels within a state is covered by the FAA while another who crosses state lines is exempt, said Gelernter, who’s also an arbitrator.

“If Congress wanted to make a certain class of workers exempt from the FAA, then it makes little sense to differentiate them based on individual tasks,” Gelernter said. “You can’t slice and dice things and have a workable rule.”

The Eighth Circuit developed an eight-part test to help courts decide whether the FAA exemption applies to workers in its 2005 decision in Lenz v. Yellow Transportation. That test considers factors like whether workers are directly responsible for transporting the goods in interstate commerce and if they’d disrupt interstate commerce if they went on strike.

But the Lenz test was developed for the transportation of goods, so it doesn’t apply to drivers who ferry passengers, Lyft argued in a recent court filing.

Even if a Lyft driver transported passengers traveling between states, “those rides would not have been the first or last leg in a single interstate trip arranged through Lyft,” the company said.

Restaurant Deliveries

Drivers for app-based companies that deliver food face their own hurdles to proving they’re engaged in interstate commerce, though those hurdles could be higher than those faced by passenger transport drivers.

Last month, a federal court in Massachusetts ruled that a DoorDash driver doesn’t fall under the FAA exemption for transportation workers. That followed rulings from Illinois federal courts saying GrubHub drivers had to arbitrate their claims against the company.

DoorDash drivers’ delivery of prepared meals, bottles of soda, and other packaged goods doesn’t count as engagement in interstate commerce, Judge Indira Talwani said.

“Instead, the final destinations from the vantage point of the interstate food distributors are the restaurant where Plaintiff picks ups orders, and not the customers to whom he makes deliveries,” Talwani said.

GrubHub drivers argue in a pending Seventh Circuit case that food is in the flow of interstate commerce even after it’s prepared into a meal.

The Seventh Circuit held in its 1968 ruling in Dean Milk v. FTC that the transformation of raw goods that came from out of state doesn’t end their interstate journey to their final destination, the drivers said.

“But in any event, GrubHub drivers also delivered packaged goods that have traveled interstate and have not been altered in any way by the restaurant and thus are indisputably still in the flow of interstate commerce,” they said.

To contact the reporter on this story: Robert Iafolla in Washington at riafolla@bloomberglaw.com

To contact the editors responsible for this story: Bernie Kohn at bkohn@bloomberglaw.com; Karl Hardy at khardy@bloomberglaw.com