By: Jacqueline Vanacore, Senior Staffer

The rise of the gig economy, accompanied by the proliferation of mandatory arbitration agreements requiring gig workers to waive their rights to litigation, has not only hindered gig workers’ ability to resolve workplace disputes but, in the absence of a statutory framework, has contributed to their struggle to be classified as employees rather than independent contractors. As employees, gig workers are better suited to confront workplace injustices by forming unions and addressing workplace concerns through arbitration procedures outlined in a collective bargaining agreement.

Overview of Mandatory Arbitration Agreements

Over the past several decades, most private-sector employers have incorporated mandatory arbitration clauses into employment agreements with non-union workers to resolve employment-related disputes. These mandatory arbitration agreements exacerbate the unequal bargaining relationship between workers and employers. The agreements force workers to address employment disputes through private arbitration rather than litigation, shielding their employers from public accountability. Workers are usually presented with mandatory arbitration agreements as a condition of employment or in lengthy employment agreements, making it difficult for workers to discern whether they waived their rights to litigation. 

In 1990, just 2.1% of private-sector employment contracts contained mandatory arbitration agreements. In 1992, mandatory employment arbitration agreements became widespread after the Supreme Court upheld their enforceability in Gilmer v. Interstate/Johnson Lane. By the early 2000s, nearly a quarter of the non-union private sector workforce was subject to mandatory arbitration agreements. Today, 56% of all private sector non-union workers are beholden to mandatory arbitration agreements by their employers, including more than 60% of workers earning less than $13 per hour.  

Class Action Waivers in Mandatory Arbitration Agreements

One of the most controversial aspects of mandatory arbitration agreements is class action arbitration waivers. While private sector mandatory arbitration agreements do not always include a class action waiver, 23% of private sector non-union workers are subject to the waivers, encompassing 24.7 million Americans. In Epic Systems Corp v. Lewis, the Supreme Court affirmed the validity of class action waivers in mandatory arbitration agreements. The court held that although §7 of the National Labor Relations Act (“NLRA”) guarantees all employees the right to organize and engage in concerted activity, mandatory arbitration agreements with class action waivers did not conflict with the NLRA. Critics of Epic, including Justice Ginsburg, believed that the decision would make it more difficult and costly for workers to assert workplace complaints. In her dissent, Justice Ginsburg disagreed with the court’s narrow interpretation of §7 and emphasized that Congress enacted the NLRA to correct the power imbalance between employers and employees by giving all workers the right to collective action.

The Gig Economy, Mandatory Arbitration Agreements & Employee Misclassification

The expanding gig economy, or the “on-demand” economy, coincides with the rise of class action waivers in mandatory arbitration agreements. The gig economy includes freelance, temporary, and contracted workers. These jobs incorporate rideshare platforms (Uber and Lyft), food and grocery delivery services (Doordash and Instacart), and personal assistants (TaskRabbit). Although the gig economy encompasses several types of work, gig work refers to workers typically paid for completing specific tasks rather than earning an hourly rate or salary. 

Gig work has a significant influence on today’s economy. The gig economy comprises over 50 million workers outside traditional employment structures and generates $45 billion in annual consumer transactions. Gig workers, typically legally classified as independent contractors (“IC”), are increasingly subject to mandatory arbitration agreements and class action waivers. Workers who assert they should be classified as employees rather than ICs cannot litigate employment misclassification claims under these agreements, which makes it difficult for workers to assert their §7 rights and attempt to improve working conditions through collective action. 

The substantial damage awards won by workers who litigated misclassification claims laid the groundwork for employers’ burgeoning preference for mandatory arbitration agreements and class action waivers. In Estrada v. FedEx, a California Appeals Court held that FedEx drivers are employees instead of ICs because FedEx maintained control over drivers by requiring them to pay for business expenses such as uniforms, fuel, insurance, and truck maintenance. The workers were awarded $14 million in damages from 2005-2008 and $12 million in legal fees. Moreover, in 2014, the Ninth Circuit held that FedEx drivers were misclassified as ICs and were owed back wages for missed meals, breaks, and overtime and were entitled to worker’s compensation and unemployment insurance. FedEx settled the class action dispute with over 2,000 drivers for $228 million. 

The FedEx cases illustrate the financial risk of misclassification lawsuits to Gig employers, whose workforce mainly consists of ICs. Although arbitration can attempt to address individual employment misclassification, the broader problem of misclassification for an entire workforce will persist. The outcome of private arbitrations is secret, non-precedential, and only applies to a small group or an individual worker. Statistics demonstrate that arbitrators who frequently rule in favor of an employer are more likely to be hired to resolve future employment disputes. Misclassification claims brought to arbitration will likely have a low dollar value, especially when workers are prohibited from filing a class action or must represent themselves in arbitration. An Uber driver who represented herself in arbitration received only $4,000 backpay for reimbursed expenses. The decision resulted in significant financial savings for Uber but inadequate compensation or justice for the worker.

Misclassification of workers through mandatory arbitration agreements deprives workers of their rights and has considerable public policy implications. Although ICs allow employers to address workforce gaps, employers can avoid the financial responsibilities of hiring employees because federal laws protecting workers apply only to workers classified as employees. ICs do not receive minimum wage, overtime, benefits, unemployment insurance, workers’ compensation, family leave, or the right to collective bargaining under the NLRA. A UC Berkeley study found that if Uber and Lyft had properly classified hundreds of thousands of drivers as employees rather than ICs, the companies would have paid more than $400 million to California’s unemployment insurance fund between 2014 and 2017.

“Labor arbitration established through collective bargaining provides a more equitable process for employees to address workplace concerns. Through collective bargaining, union members collaborate with their employers to define the terms and conditions of their employment.”

Jacqueline Vanacore

Courts have also demonstrated deference to mandatory arbitration agreements rather than litigating class action disputes. In June 2022, Uber and Lyft drivers filed a class action antitrust lawsuit in California, accusing the companies of unfairly controlling passenger fares. The drivers, who previously opted out of some arbitration agreements, asserted that, as ICs, they have economic independence to establish passenger fares. The companies argued that the claims should be arbitrated based on additional employment agreements signed by the drivers. The San Francisco Superior Court concluded that the drivers failed to opt out of all of the arbitration agreements, dismissed the case as a prospective class action, and held that the drivers must individually arbitrate. Earlier this month, the drivers dropped their appeal, and it is unclear if they will pursue arbitration. 

Contrast Between Mandatory Arbitration & Labor Arbitration        

Absent a federal statute delineating specific criteria for proper gig worker classification, policy and judicial attempts have been made to help workers overcome the burden of mandatory arbitration agreements and assert their misclassification claims in court. In 2023, Congress reintroduced the FAIR Act, which banned mandatory arbitration agreements in employment contracts and ensured workers could litigate workplace disputes. In March 2024, the Department of Labor (DOL) adopted a six-factor test that narrowed the definition of an IC, making it more likely that certain workers will be reclassified as employees and entitled to minimum wage, overtime, and employee benefits. When an agency or court can consider an employment misclassification claim, the “control test” or the “economic realities test” is applied to help determine employment classification and consider factors like employer control and bargaining inequality. Rideshare drivers assert they should be classified as employees because companies like Uber and Lyft exert significant control over them through their ability to terminate at will, evaluate driver qualifications, and restrict or prohibit their use of the driver application. Correctly classifying ICs as employees will open the door for thousands of workers to organize unions and provide them with an improved forum to assert workplace concerns through voluntary labor arbitration (“labor arbitration”).

Labor arbitration established through collective bargaining provides a more equitable process for employees to address workplace concerns. Through collective bargaining, union members collaborate with their employers to define the terms and conditions of their employment. A typical collective bargaining agreement includes provisions for labor arbitration to resolve disputes that cannot be resolved through the contractual grievance process. This arbitration process ensures employee protections, such as paid time off for participation, the ability to choose an arbitrator, and cost-sharing between the employer and employees. Unlike mandatory arbitration, which precludes the right to appeal, labor arbitration allows for a multi-level appeal process, offering workers a fair chance to challenge decisions. Also, a balance of experience among union and employer representatives in labor arbitration is essential for creating a level playing field and ensuring favorable outcomes for employees. Creating labor arbitration agreements through collective bargaining ensures workers’ fairness and protection while fostering collaborative dispute resolution.

Technological advancements have altered the nature of work. Eliminating barriers, such as mandatory arbitration agreements, that prevent gig workers from exercising their rights at work is essential. This will help promote workplace fairness and transparency for gig workers and benefit the wider community.