Epstein Becker Green Persuades California Court of Appeal to Uphold the Right to Contractual Arbitration Against Wage Claims By Independent Contractor

May 1, 2015

Epstein Becker Green (“EBG”) achieved a significant victory in the California Court of Appeal for its clients Prime Time Shuttle, Inc., and Rideshare Airport Management, LLC, on a motion to compel arbitration. In this case, Khalatian v. Prime Time Shuttle, Inc. et al., 2015 Cal. App. LEXIS 498 (Cal. App. 2d Dist. May 15, 2015), the plaintiff, an owner-operator driver, alleged that the defendants misclassified him as an independent contractor and, thus, failed to pay him all wages due, among other alleged violations of California’s wage and hour laws and Unfair Competition Law.

When EBG took over the case from predecessor counsel, a motion was made to compel arbitration pursuant to the arbitration provision in the parties’ services contract. The trial court denied Prime Time and Rideshare’s motion. The trial court ruled that the plaintiff’s wage and hour claims were based on statute, the California Labor Code, and therefore were not arbitrable, and that the defendants waived arbitration.

In cases where plaintiffs alleged that they were misclassified as independent contractors and denied unpaid wages and other obligations owed to employees, California courts have held that Labor Code claims are based on statutory rights, not a contract between the parties. Courts have held that Labor Code claims are not subject an arbitration agreement because the claims do not “arise out of or relate to” the parties’ services contract. (See Hoover v. American Income Life Ins. Co. (2012) 206 Cal.App.4th 1193, 1206-1208, and Elijahjuan v. Superior Court (2012) 210 Cal.App.4th 15, 23-24.)

However, an exception to California’s rule against arbitration of statutory wage claims exists when the arbitration agreement is governed by the Federal Arbitration Act (“FAA”). The FAA preempts any contrary state rule restricting arbitration. EBG appealed the trial court’s ruling and successfully persuaded the Court of Appeal that the FAA applied to the plaintiff’s claims. Unlike the defendants in Hoover and Elijahjuan, Rideshare presented ample evidence that the parties’ contract affected interstate commerce, resulting in the FAA’s preemption of any contrary California rule preventing arbitration, and that the plaintiff’s claims did, in fact, arise out of or relate to in the parties’ services contract. EBG also successfully persuaded the Appellate Court that the defendants did not waive arbitration. On May 1, 2015, the Court of Appeal reversed the trial court’s ruling in full, and on June 9, 2015, the Court of Appeal granted EBG’s request to publish its Opinion.

This victory is important in upholding the defendants’ right to contractual arbitration. In addition, this published Opinion provides favorable precedent for alleged employers defending against wage and hour claims by independent contractors and provides guidance on drafting arbitration agreements with independent contractors.

The EBG team representing Prime Time and Rideshare included David Jacobs, William O. Stein, and Rhea G. Mariano.