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January 18, 2011
Was He an Employee, Not a Contractor?

A driver agreed in 2003 to work for a limousine company as an independent contractor. And, he signed an agreement that not only specified he was a contractor but also required him to submit all disputes to arbitration. But after working there for 7 years, he decided to sue, charging that he was an employee and was owed considerable back overtime pay.

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What happened. “Schultz” joined Aventura Limousine & Transportation Service as a driver. The agreement he signed described him as an “independently established business.” In 2008, Aventura asked its drivers to sign an amendment to the agreement, which dealt with adjudicating disputes. It specified that “any dispute, claim or controversy arising out of or relating to this agreement … or any other matter regarding the legal relationship between [Aventura and Independent Contractor] … shall be determined by a single arbitrator in proceedings administered by the American Arbitration Association.”

Although Schultz signed the amendment, he sued for violation of the Fair Labor Standards Act (FLSA) in 2010, arguing that he’d been an employee all along and was owed overtime. Aventura quickly moved to compel arbitration, and the lawsuit went to federal district court to be heard.

What the court said. The district judge considered several questions. First, can FLSA claims be among the disputes to be arbitrated? She ruled that they can. Next, was there a valid agreement to arbitrate? Schultz argued that there had been a severe imbalance of bargaining power between him and Aventura when he signed the agreement and amendment. The judge ruled that an imbalance of power, by itself, was not enough to invalidate the documents. Schultz should have understood what he was signing, and he could have found a job elsewhere—a very strict standard that not all states would hold.

Third, was the agreement basically fair? Here, the judge acknowledged one unfairness: A plaintiff in court with an FLSA case can recover attorney’s fees if he or she wins, but not so in the arbitration agreement. It required Schultz to pay his own attorney’s fees regardless. So the judge dropped that provision of the agreement, ruling that the rest of it was still valid. Finally, she ruled that Aventura had not acted in any way to waive the arbitration agreement in Schultz’s case. So he must submit the dispute to arbitration. Schatt v. Aventura, U.S. District Court for the Southern District of Florida, No. 10-22353-Civ-Cooke/Bandstra (2010).

Point to remember: Schultz probably should have been designated an employee all along. But an arbitrator could still find that he was, in fact, an employee under IRS and DOL guidelines.

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