In Elijahjuan v. Superior Court, Case No. B234794 (2nd Dist, Div. 8, Oct. 17, 2012), the California Court of Appeal held that the specific language of an agreement did not require plaintiffs to arbitrate their claims for misclassification as independent contractors in a wage and hour putative class action, concluding that the arbitration language covered only disputes arising from the “application or interpretation” of the plaintiffs’ work agreements.

Plaintiffs were truck drivers who filed a class action lawsuit against Mike Campbell & Associates (“Campbell”), claiming that they were denied wage-and-hour benefits under the California Labor Code, as a result of allegedly being misclassified as independent contractors. Plaintiffs also sued for violation of the Unfair Business Practices Act and negligent misrepresentation. Plaintiffs had each signed a work agreement with Campbell, stating that they were independent contractors, not employees, and not subject to the control of Campbell, and detailing the terms of their compensation. The work agreements expressly stated: “having entered into this Agreement in good faith, the Parties agree that the terms and procedures set forth herein shall be controlling if a dispute arises with regard to its application or interpretation.” The agreements also contained an arbitration clause, stating in part: “The arbitrator shall base the award on the terms of this Agreement, federal transportation law, . . . and . . . the law of the Federal Arbitration Act[.]”

Campbell moved to compel arbitration based on the work agreements signed by Plaintiffs. The trial court granted the motion and compelled arbitration of all claims except for the Unfair Business Practices Act, which it severed and stayed. The trial court also denied Plaintiffs’ request for class arbitration. Plaintiffs then appealed.

The Court of Appeal, in a 2-to-1 split decision, reversed the trial court’s rulings. The majority held that the arbitration provision did not apply to plaintiffs’ dispute, explaining that Plaintiffs did not sue to enforce rights guaranteed to them under their contracts, but rather to enforce rights set forth under the California Labor Code. The majority reasoned that the “critical dispute” was whether plaintiffs were truly independent contractors based on extra-contractual legal factors (e.g., the level of skill required to perform the job, whether the workers supplied their own tools, how long it took them to perform the service, etc.), and not whether the work agreements described plaintiffs as independent contractors. The majority found its holding bolstered by the specific contract term requiring the arbitrator to base an award on the terms of the agreements, federal transportation law, and the Federal Arbitration Act (“FAA”). Taking into account the fact that the agreement did not specifically identify California law as one of the consideration bases, the majority held that the arbitrator was not authorized to analyze the California Labor Code claims. The Court of Appeal thus issued a writ of mandate directing the trial court to vacate its order that granted the company’s motion to compel arbitration.

Justice Grimes dissented alone. In the dissenting opinion, she argued that the majority imposed a narrow interpretation of the scope of arbitration, which “ignored well-settled law favoring arbitration and requiring that any doubt about the applicability of an arbitration clause ‘must be resolved in favor of arbitration.’” She noted that the United States Supreme Court held in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1747 (2011), that a state law rule prohibiting arbitration of a particular type of claim “is displaced by the FAA.” Justice Grimes further contended that the majority’s ruling violated Concepcion by effectively creating a judicial rule that bans arbitration of wage-and-hour claims brought by purported independent contractors.

Justice Grimes expressed further disagreement with the majority, stating that the terms of the work agreements were pivotal to deciding whether plaintiffs were independent contractors. Notably, the agreements expressly classified the plaintiffs as independent contractors, stated that Campbell could not control or supervise plaintiffs, and extensively described how plaintiffs would be compensated. As such, these specified terms should have impacted the determination of whether plaintiffs were rightfully classified as independent contractors. Moreover, Justice Grimes was not persuaded that the arbitrator lacked the power to interpret and apply the California Labor Code. In light of the contract’s California choice-of-law provision, Justice Grimes concluded that, when viewed as a whole, the contract permitted the arbitrator to issue awards based on California law.

Having found that the arbitration provision encompassed plaintiffs’ claims, Justice Grimes next addressed whether plaintiffs were nevertheless exempt from arbitration because the FAA does not apply to employment contracts with transportation workers. She concluded that this issue could be resolved only by determining whether plaintiffs were independent contractors (and therefore not exempt from the FAA) or if they instead were exempt as transportation worker employees. Justice Grimes found that substantial evidence supported the trial court’s ruling that plaintiffs were independent contractors: Campbell had offered evidence that the title on the trucks was in plaintiffs’ names, that plaintiffs were paid by each delivery rather than on an hourly basis, and that plaintiffs were not required to work exclusively for Campbell. As a side note, Justice Grimes noted that this determination was only for the purpose of determining the arbitration issue, and did not preclude the arbitrator from subsequently addressing the misclassification issue on the merits.

Justice Grimes also observed that plaintiffs had claimed the arbitration provisions were unconscionable under the principles in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000). The trial court had refused to address this defense to arbitration on the merits, concluding that, per Concepcion, the FAA preempted state law unconscionability defenses to arbitration. Justice Grimes “hesitate[d] to conclude that Concepcion abrogated Armendariz” and noted that the United States Supreme Court’s subsequent decision in Marmet Health Care Center, Inc. v. Brown, 132 S.Ct. 1201 (2012), reached a contrary conclusion when it remanded for a determination of whether the arbitration agreements at issue were unenforceable based on general state common law principles. Therefore, Justice Grimes concluded that the FAA did not preempt plaintiffs’ unconscionability defense.

Lastly, Justice Grimes opined that the trial court properly denied class arbitration. She explained that the agreements were silent on the issue of class arbitration, and plaintiffs never claimed that an implied agreement existed permitting class arbitration. Citing to Stolt-Nielsen S.A. v. AnimalFeeds International, 130 S.Ct. 1758 (2010), and Reyes v. Liberman Broadcasting, Inc., 208 Cal.App.4th 1537, 1543-45 (2012), Justice Grimes concluded that there was no basis for class arbitration. She also was “not persuaded” that the National Labor Relations Act “somehow guarantees a right to class arbitration of employment disputes,” implicitly disagreeing with the National Labor Relations Board’s decision of In re D.R. Horton, Inc., 357 N.L.R.B. No. 184 (2012), which currently is on appeal to the Fifth Circuit and likely will have a decision issued by early 2013.

So, based on the rulings issued by the Court of Appeal in this decision, employers must be very cautious of the language that they use in arbitration agreements and take every effort to make clear that all employment-related claims, including those under California law, are to be arbitrated.

Should you have questions regarding application of employment or labor law to your particular situation, please contact a labor and employment attorney at Sheppard Mullin for guidance.