Federal Appellate Court Vacates Arbitration Order in New Jersey Misclassification Lawsuit

The court system encourages litigants to attempt alternative dispute resolution (ADR) before taking their cases to court. Many employment contracts in New Jersey and nationwide include clauses requiring arbitration before (or instead of) going to court. The Federal Arbitration Act (FAA) strongly favors these clauses, but it exempts certain groups of workers. The Third Circuit Court of Appeals recently vacated an arbitration order in a New Jersey employment class action. It found that the plaintiff, a driver for a major rideshare company, could be part of an exempt group under the FAA.

The Third Circuit case deals with alleged misclassification of employees as independent contractors, a common issue with rideshare companies and other “gig economy” employers. Employees are protected by multiple local, state, and federal statutes governing wages, hours of work, working conditions, paid and unpaid leave, discrimination and harassment, and more. Independent contractors do not enjoy most of these legal protections. Under New Jersey law, a worker is considered an employee unless they meet the “ABC test,” which looks at the degree of control the employer may exercise over the worker, and the extent to which the worker has their own established trade or business. See N.J. Rev. Stat. §§ 43:21-19(i)(6)(A), (B), (C).

ADR offers some advantages over litigation, but for employees seeking relief under New Jersey’s employment statutes, it can also have disadvantages. The parties must pay all of the costs associated with ADR, including the fees charged by arbitrators, mediators, or other ADR specialists. This can give employers with deep pockets an advantage. The FAA sets a very high bar for challenging, modifying, or vacating an arbitration award. In order for a court to compel arbitration in an employment lawsuit, however, an employer must first demonstrate that the FAA applies to its employees.

The FAA states that written arbitration agreements are “valid, irrevocable, and enforceable” as long as they are otherwise valid under the law of contracts. 9 U.S.C. § 2. The statute has a residual clause that exempts employment contracts for “seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Id. at § 1. The question for the Third Circuit was whether rideshare drivers count as “any other class of workers engaged in foreign or interstate commerce.”

In January 2017, a judge in the U.S. District Court for the District of New Jersey dismissed the plaintiff’s complaint and ordered the parties into arbitration. The judge rejected the plaintiff’s argument that he was exempt from the FAA under the residual clause. She held that the exemption only applies to “the movement of physical goods in interstate commerce,” not the transportation of passengers.

The Third Circuit vacated the lower court’s order in September 2019. It held that “longstanding precedent” established that the residual clause could apply to workers who transport passengers “in work so closely related [to interstate commerce] as to be in practical effect part of it.” The court remanded the case for further proceedings on the “engaged-in-interstate commerce inquiry.”

The Resnick Law Group’s experienced and knowledgeable arbitration lawyers represent workers in New Jersey and New York, helping them assert their rights in claims for unlawful employment practices. Please contact us today online, at 973-781-1204, or at 646-867-7997 to schedule a confidential consultation with a member of our team.

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