Employee-Specific Arbitration Agreements: Could They Backfire for Buyers?
For prospective buyers, the due diligence process necessarily includes a review of employment-related liabilities that could flow through the deal. In recent years, businesses have trended towards requiring employees to submit employment disputes to arbitration, waiving rights to class or collective actions. Many companies benefit from forcing employees to arbitrate claims. This process typically avoids the costs and publicity of (public) litigation. That sense of security, however, may be threatened due to a recent strategy implemented by workers to file thousands of individual demands for arbitration, requiring the employer to pay an exorbitant amount of arbitration fees well before an arbitrator or judge renders a decision on the merits of the employees’ claims.
Couriers working for Postmates have recently utilized this tactic. Postmates delivers food from restaurants, groceries and other goods to consumers on its web-based platform. The company hires couriers to make the deliveries and classifies them as independent contractors. The company required its couriers to sign individual arbitration agreements when they were hired. Now, the company will likely incur millions of dollars in arbitration fees in accordance with the American Arbitration Association’s (AAA) standard schedule of filing fees. In July 2018, the couriers filed a complaint that included claims under California’s Private Attorney General Act (PAGA) and a class action in state court, alleging that Postmates misclassified couriers as independent contractors. Rimler et al. v. Postmates Inc., case number CGC-18-567868 (Cal. App. 4th Supp. 2018). In accordance with its individual arbitration agreements, Postmates successfully moved to compel arbitration in the PAGA case and the class action. Id. After the case was sent to arbitration, thousands of employees in the class filed individual demands for arbitration.
In April and May 2019, 5,000 additional Postmates couriers filed demands for arbitration with the AAA, alleging that they should be considered Postmates’ employees and paid the minimum wage and overtime under federal and state wage laws. The couriers paid approximately $100,000 for their portion of the arbitration fees. Under AAA’s standard fees schedule, Postmates owed approximately $1,900 per claimant to initiate individual arbitrations. In total, the company owed AAA nearly $9.36 million, which a federal district court ultimately compelled it to pay.
In another tranche of misclassification cases, the number of individual arbitration demands increased to 10,356. AAA required Postmates to pay nearly $4.7 million by April 15, 2020, (in addition to the $9.7 million mentioned above) to initiate the arbitration process for those cases. Nor is this a phenomenon specific to one company. For example, recently, DoorDash and Uber have been forced to arbitrate thousands of individual claims and pay millions of dollars in fees as a result of their mandatory arbitration agreements with their respective workers.
In negotiating merger transactions, prospective buyers should be aware of the potential costs that arise from these agreements and should conduct due diligence appropriately
The lesson — a sophisticated plaintiffs’ bar has found a way to combat the proliferation of mandatory arbitration agreements. In negotiating merger transactions, prospective buyers should be aware of the potential costs that arise from these agreements and should conduct due diligence appropriately. Prospective buyers need to consider how individual arbitration agreements could impact operations. For companies acquiring large workforces, the cost of filing individual arbitrations could substantially outweigh the cost of defending a class or collective action. In that case, prospective buyers may consider structuring the deal in a way that allows them to avoid responsibility for the costs arising from mandatory arbitration agreements. On the other hand, there may be cases in which the prospective buyer would rather incur the costs of arbitrating individual claims to avoid the publicity of litigation and protect future goodwill. In either case, buyers need to consider the potential impact of extant arbitration agreements on their business strategies and profitability.