Arbitrating Independent Contractor Agreements

• Publication year: 2014
• Author: By Joel M. Grossman

Arbitrating Independent Contractor Agreements

By Joel M. Grossman

Joel M. Grossman is a mediator and arbitrator with JAMS in Los Angeles. He has been selected four times as one of the Top Neutrals in California by the Daily Journal. For more information please go to www.grossmanmediation.com.

California employment lawyers know that when an employment agreement includes a mandatory arbitration clause, absent unconscionable terms, the contract will be enforced as long as it conforms to the basic provisions of Armendariz v. Foundation Health Psychcare Services, Inc.¹ But what if the arbitration clause is found in what purports to be an independent contractor agreement? If the purported independent contractor wishes to challenge that classification, claiming that she is an employee and entitled to all of the benefits of employment (such as overtime and meal and rest breaks), must she submit her claim to arbitration per the contract? This is the primary issue in the recent court of appeal decision of Galen v. Redfin Corporation.²

Scott Galen worked as a real estate "field agent" for Redfin Corp., which is based in the State of Washington. He and Redfin had entered into a "Field Agent Independent Contractor Agreement," which, as the name suggests, provided that he would be an independent contractor, performing such tasks as holding open houses and conducting tours of houses for prospective buyers. He was required to pay for certain expenses, such as membership in a multiple listing service and auto insurance.

Galen filed a class action lawsuit in court on behalf of himself and other "field agents," arguing that they were misclassified and should be deemed employees. Neither the opinion nor this article discusses the merits of this claim; rather, the focus is on whether the arbitration clause required Galen to submit his individual claim to arbitration and, if so, whether the forum selection clause, which required Galen to arbitrate his claim in the State of Washington, was unconscionable.

The trial court denied Redfin's motion to compel arbitration, basing its finding on the following language in the arbitration clause: "All disputes among the parties arising out of or related to this Agreement which have not been settled by mediation shall be resolved by binding arbitration within the State of Washington."³ The plaintiff argued, and the trial court agreed, that the claims based on misclassification were extra-contractual, meaning that they did not "arise out of or relate to" the agreement. Rather, they arose out of the California Labor Code, which requires employees to be paid overtime and to be provided with meal and rest breaks. There was no reference to the Labor Code, or to its overtime or meal and rest break provisions, in the independent contractor agreement. Thus, the claim did not "arise" out of or "relate to" the agreement. Further, the plaintiff argued, and the trial court agreed, the matter must be determined under California, not Washington, law.

The court of appeal reversed, holding that the arbitration clause was enforceable, as was the choice of forum requiring the arbitration to be held in Washington. Key to the court's ruling was its understanding of the terms "arising out of" and "relating to" the agreement. In describing the plaintiff's contentions, the court explained that the plaintiff "asserts the assessment of whether he and the purported class were misclassified 'will turn on statutory factors set forth by California law and not any rights afforded by the Agreement.'" In other words, statutory wage and hour claims do not arise out of the agreement, and therefore the arbitration agreement cannot apply. The court of appeal quoted the trial court's conclusion that plaintiff's claims do not arise out of or relate to the agreement because they "will be determined by applicable wage and hour law, regardless of the Agreement's terms."⁴

The court of appeal began its analysis by noting that in Perry v. Thomas,⁵ the U.S. Supreme Court held that section...