Independent Contractor Misclassification and Compliance News September 2021

1. Ninth Circuit Court of Appeals Reverses Lower Court’s Ruling and Says California’s Ban on Arbitration Agreements as a Condition of Employment is Permissible

The 9th Circuit Court of Appeals overruled a lower court’s decision that a California’s statute prohibiting employers from requiring employees to sign arbitration agreements was preempted by the Federal Arbitration Act (FAA). California’s AB 51 prohibits an employer from requiring that an employee to sign an arbitration agreement as a condition of employment, continued employment, or any employment-related benefit. Arbitration agreements are the best way to avoid class action lawsuits by employees and by independent contractors who allege that they were misclassified as employees. While a company can still require an independent contractor to sign an arbitration agreement, if the worker alleges that s/he was misclassified and should have been treated as an employee, then there may be a question about the applicability of AB51.

AB51 was enacted in 2019 and become effective January 1, 2020. AB 51 added § 432.6 to the California Labor Code. That section provides:

(a) A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act (Part 2.8 (commencing with Section 12900) of Division 3 of Title 2 of the Government Code) or this code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.

(b) An employer shall not threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure for a violation of the California Fair Employment and Housing Act or this code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.

(c) For purposes of this section, an agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights is deemed a condition of employment.

. . .

(f) Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act (9 U.S.C. Sec. 1 et seq.).

This section of AB51 prohibits mandatory employment arbitration agreements for employment-related claims. AB51 was challenged before it became effective with the claim that it was unenforceable because it was preempted by the FAA. A federal court agreed with the challengers and its decision was appealed to the Ninth Circuit Court of Appeals.

The Ninth Circuit said that said that AB51 only regulated pre-agreement behavior; that AB51 did not invalidate properly formed arbitration agreements; and that AB51 only required that the parties voluntarily enter into the arbitration agreement. The Ninth Circuit relied, in part, on a section of the FAA that says an arbitration agreement is enforceable except when there is fraud, duress, or unconscionability—claims that are applicable to all contracts, not just arbitration agreements. The Ninth Circuit said that this clause, the “saving” clause, permitted California to regulate when an agreement is voluntarily entered into as long as it didn’t only apply to arbitration agreements.

The Ninth Circuit Court of Appeals’ decision was issued by 3 judges and may be appealed to the full Ninth Circuit to review and/or ultimately to the United States Supreme Court. In the interim, companies that have employees and independent contractors sign arbitration agreements in California should review their practices to ensure that they can demonstrate that the agreements were not a condition of employment and were entered into voluntarily.

2. Florida Requires Companies to Report Independent Contractors as part of New Hire Reporting

Under federal law, employers are required to report new employees to the National Directory of New Hires (NDNH). New Hire reporting helps enforce child support orders and prevent fraud in unemployment and workers compensation benefits.

While federal law does not require employers to report independent contractors as new hires, a number of states do require employers to report hiring independent contractors. As of October 1, 2021, Florida employers will be required to report new hires of independent contractors.

Other states that have requirements hat independent contractors be included in new hiring reporting include California, Colorado, Connecticut, Iowa, Maine, Massachusetts, Nebraska, New Hampshire, New Jersey, Ohio, Texas, Utah, Virginia, and West Virginia.

For more information, check out our resources page on misclassification and compliance. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help.