Can Companies Require the Arbitration of Disputes Brought By a Vendor’s Workers?

Both before and after the U.S. Supreme Court’s important recent decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) holding that class action waivers in arbitration agreements are not precluded by federal labor law, many employers have implemented arbitration agreements with their employees specifying that employment disputes with the company must be arbitrated on an individual basis only, and not as part of a class or collective action.  Our analysis of Epic Systems is available here.

But can companies require the arbitration of disputes brought by workers who, although they are paid by a third-party staffing agency or service provider, allege that they were employed by the company?  The reality is that despite companies’ efforts to disclaim employment relationships with vendors’ workers, these workers often allege otherwise through a variety of suits, including unpaid overtime, discrimination, retaliation, harassment, and personal injury lawsuits.

Recent cases have suggested at least two ways in which companies have successfully obligated vendors’ workers to arbitrate disputes.  First, some companies contract directly with the worker to require arbitration.  While that approach is relatively straightforward, some companies prefer to avoid direct contractual relationships with workers who are, after all, employed and paid by other entities.

A more common approach is for the company to be identified as a third-party beneficiary of an arbitration agreement between the worker and the employing entity.  Most courts, including courts applying Texas law, will enforce an arbitration agreement on behalf of a non-signatory to the agreement if the agreement clearly indicates the contracting parties’ intent to confer a direct benefit (in this case, the worker’s promise to arbitrate) on the third party.  See, e.g., In re NEXT Fin. Group, Inc., 271 S.W.3d 263 (Tex. 2008); In re Palm Harbor Homes, Inc., 195 S.W.3d 672 (Tex. 2006).  Careful drafting is required, however, because there is a presumption that parties contract only for themselves.  See City of Houston v. Williams, 353 S.W.3d 126 (Tex. 2011).

The Bottom Line for Employers

The courts have provided options for companies wishing to arbitrate disputes with vendors’ workers on an individual basis only.  The most common option is to assure that the company is a third-party beneficiary of an agreement to arbitrate between the worker and the employing entity.  Companies therefore should review the language of such arbitration agreements to assure that it encompasses claims against the company and clearly indicates the contracting parties’ intent to confer this benefit on the company.  As part of this review, companies should check the law of the jurisdiction that controls the agreement, as each state’s third-party beneficiary requirements differ slightly in formulation.  Retaining legal counsel to assist in these tasks is advisable.

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