Millions of dollars in wages and benefits turn on the question of who is an employee and not an independent contractor. Just how many millions are at stake became abundantly clear earlier this week, when lawyers for Uber drivers in California and Massachusetts revealed that the drivers stood to win as much as $852 million in lost tips and expenses if they proved they were misclassified as independent contractors. But first, lawyers would have to convince a jury that the drivers were really employees.
To decide that, jurors would have to weigh a number of factors about the relationship between the worker and the employer and the nature of the job itself. The trick is, those factors tend to point in different directions—for example, while Uber controls many aspects of how drivers do their jobs in minute detail (favoring employee status), drivers typically own their own cars and set their own schedules (favoring independent-contractor status). Much turns on this often-fuzzy distinction: If the drivers are independent contractors, then they are not entitled to the minimum wage, overtime pay, or the right to form a union, but if they are employees, then they have a right to those benefits and many more.
The most effective way for workers to resolve the question of whether they are employees or independent contractors is a class-action lawsuit. But this avenue is increasingly closed off to them, as companies demand that workers pursue their claims in individual arbitration—something they are unlikely to do. With individual arbitration agreements becoming routine in workplaces, it is fair to say that whether or not they are enforceable will determine if established labor and employment protections are to be meaningful, or illusory, for many workers. That high-stakes question is likely headed to the Court in the coming months and years; what’s more, the next Justice will likely cast the deciding vote.
Misclassification claims and individual arbitration agreements are not unique to the gig economy, but their confluence in this new context highlights the challenges that each poses to workers. First, sorting out misclassification claims often entails expensive discovery leading up to a potentially lengthy trial. But whether workers win or lose ultimately boils down to a judgment call about which factors seem to predominate—a witches’ brew of expense and uncertainty. And while close cases are not unique to the gig economy—for example, the question of whether FedEx drivers were independent contractors plagued the courts and administrative agencies for years, with mixed results—app-based work adds a new layer of complexity to an already difficult question. The resulting morass led former Obama administration officials Seth Harris and Alan Krueger to conclude that it would be better to create a third category to describe workers trapped in the grey area—the “independent worker”—than to continue to grapple with the binary employee/independent contractor distinction.
Considering the financial benefits of being an employee, it is unsurprising that misclassification cases involving gig economy workers have proliferated. And for the same reason, these cases can pose an existential threat to the companies involved. Thus, the recent settlement of two leading misclassification cases, involving about 385,000 Uber drivers in California and Massachusetts, rippled through both Silicon Valley and labor and employment circles. The proposed agreement, which still must be approved by a judge, includes a payout of up to $100 million to the drivers, as well as non-monetary concessions. The latter include allowing drivers to inform passengers that tips are welcome (and not included with the fare), the creation of a drivers’ association that will convey drivers’ concerns to Uber management, and procedural protections for terminated drivers. But the settlement does not require Uber to treat drivers as employees in the future.
One-hundred-million dollars stands to buy a lot of peace and quiet for Uber. But that sum becomes far less eye-popping when one considers the number of drivers involved, and that attorneys’ fees must come out of the same pot. If the settlement is approved, drivers with the strongest individual cases stand to get as much as $8,000, but many drivers will be entitled to amounts so low that they may not bother to claim their share. And in exchange, they waive their rights to bring their own misclassification lawsuits and to participate voluntarily in governmental investigations of Uber’s classification of drivers through the date the settlement agreement is approved.
Why would workers and their attorneys agree to settle potentially valuable misclassification claims for nominal sums? For many, the answer lies in individual arbitration agreements, which preclude workers from banding together to press their claims. For most workers, having to proceed individually will mean not proceeding at all, because the value of their individual claims are too low. Even when the corporate defendant must pick up most of the costs of holding the arbitration itself, hiring counsel to handle these fact-intensive cases will nearly always be prohibitively expensive for workers, and lawyers who work on a contingency basis will rarely be attracted to individual misclassification claims. Businesses count on this dynamic—ironically, if an employer actually faced the prospect of hundreds of thousands of simultaneous individual arbitration proceedings, it would likely ask to have them consolidated in the interest of efficiency.
A recent series of Supreme Court cases, many decided along familiar five-to-four, conservative-to-liberal lines, have held that arbitration agreements should be robustly enforced, even if they make it practically impossible for plaintiffs to protect their rights. Justice Scalia was not just a reliable vote for the majority on this issue—he also drafted the majority opinions in key pro-arbitration cases. In his characteristically to-the-point style, Justice Scalia wrote in 2013 that an individual arbitration clause in an American Express merchant contract was enforceable even though the low dollar-value of the plaintiff’s claim meant the plaintiff could not effectively vindicate his or her rights. And in a 2011 case, Justice Scalia rejected a California rule that protected consumers’ rights to arbitrate their claims as a class, writing that “class arbitration greatly increases risks to defendants.”
This means that the individual arbitration agreements that both gig and traditional economy workers are routinely asked to sign can pose a bigger barrier to prosecuting misclassification cases than the underlying uncertainty in employment law. That much was evident when attorneys for 150,000 California Lyft drivers attempted to settle a misclassification case for $12.25 million. The plaintiffs’ attorneys explained the low average per-driver award by observing that individual arbitration agreements that the drivers had signed made it “very difficult if not impossible, to pursue this case on a class basis.” Individual arbitration clauses also play a large role in the recent Uber settlement—while a federal trial court had invalidated the clauses on grounds particular to California law, the settlement avoids the significant risk that the Ninth Circuit would have reversed this ruling, disbanding the class in the process.
Even as the Supreme Court has been increasingly receptive to individual arbitration agreements and hostile to class actions, administrative agencies have begun to fight back. For example, the Consumer Financial Protection Bureau just proposed a rule that would ban financial companies from wielding individual arbitration agreements against consumers. More important for workers, the National Labor Relations Board has issued a series of decisions holding that employment contracts that prevent workers from pursuing their claims on a class basis in some forum—either arbitration or court—violate the National Labor Relations Act. As the Board put it, the “core objective of the National Labor Relations Act is the protection of workers’ ability to act in concert, in support of one another,” including through litigation. Accordingly, the very aspect of individual arbitration agreements that makes them so appealing to many employers—that they prevent workers from joining together—means they violate the NLRA’s 80-year-old protections for workers’ concerted action.
The Board’s conclusion is not without its detractors, including most federal courts that have considered the issue. (In addition, there is a certain circular quality to this argument as it applies in misclassification cases, because the NLRA applies only to employees—so where workers are truly independent contractors, they cannot invalidate their arbitration agreements on this basis.) Yet, the NLRB is standing firm, signaling that it will continue to adhere to its own view until and unless the Supreme Court disagrees. And its position recently drew some support from the federal judge in the Lyft case, who rejected the proposed settlement for failing sufficiently compensate drivers. That judge observed that, in light of the NLRB’s rule, perhaps the individual arbitration agreements were not so ironclad after all—lessening the degree of risk to the drivers, should they press their case to trial.
Before Justice Scalia’s death earlier this year, it was a near certainty that the Roberts Court would reject the NLRB’s rule, and hold that individual arbitration agreements should be enforced in the employment context—even if they render employment-law protections illusory for most workers. But Judge Garland (or another Justice nominated by a Democratic president) may cast a more skeptical eye on these agreements. Further, Judge Garland has consistently deferred to legal interpretations adopted by federal agencies—whether controlled by Democrats or Republicans—including the NLRB. Thus, the NLRB’s rule on individual arbitration agreements will almost certainly receive a more favorable reception from Justice Garland than it would have from Justice Scalia, though it is impossible to predict whether he would ultimately vote to uphold the rule.
Whether individual arbitration agreements are enforceable will determine whether millions of workers can challenge their treatment by their employers at all. But it is just one of many issues of great importance to workers with which courts and agencies are now grappling. Some of these issues will ultimately reach the Supreme Court; many others will be resolved in the high Court’s shadow. Replacing the archetypal conservative Justice Scalia with even a center-left judge like Garland would be the biggest tectonic shift in the Court's ideology since 1991, when Clarence Thomas replaced Thurgood Marshall. A left-leaning majority on the Supreme Court could unravel decades of conservative gains on issues ranging from access to abortion to voting rights to campaign finance and, of course, workers’ rights. For the American middle class, Garland's confirmation—and the possible arrival of a “pro-worker” Supreme Court—could have immediate and concrete consequences in offices and on shop floors across the country.
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