Key Supreme Court Decision on Arbitration is Not Likely to Affect State Workers’ Compensation Laws

In the recent decision of Epic Systems v. Lewis, 138 US 1612 (2018), the Supreme Court affirmed a preference for arbitration, ruling that agreements between employers and employees requiring individual arbitration are enforceable in employment contracts, even as a condition of the employment itself. Though the decision specifically addresses arbitration agreements limiting collective actions, the ruling could be extrapolated to validate other agreements between employers and employees. While this decision is unlikely to lead to arbitrations displacing New Jersey workers’ compensation statutory scheme, the Court’s dedication to arbitration could have indirect effects sooner rather than later.

Epic Systems v. Lewis

In Epic Systems the Supreme Court sought to settle the issue of whether arbitration agreements entered into as a condition of employment are enforceable. More specifically, the particular arbitration agreements at issue required individualized arbitration and banned collective judicial or arbitral proceedings such as class actions. The Supreme Court addressed three consolidated claims that “differ[ed] in detail but not in substance” as the Court noted. The example offered by the Court at the outset of the decision touched on the specific facts of one of the three cases: Ernst & Young LLP v. Morris.

In that case, Mr. Morris accepted employment with Ernst & Young and entered an agreement to arbitrate any disputes that may arise between him and the employer. The agreement specified that the arbitration must be on an individual basis. Different disputes with other employees would need to be heard in separate proceedings.

After his separation from employment, Mr. Morris raised wage and hour claims and alleged the employer violated the Fair Labor Standards Act (FLSA) for misclassification of employees, i.e. paying salaries without overtime. Mr. Morris sought to litigate this claim in federal court on behalf of a nationwide class. The employer argued that the employment agreement required all disputes be subject to arbitration and further required the dispute be brought by Mr. Morris alone.

Writing for the 5-4 majority, Justice Neil M. Gorsuch held that federal courts have long favored arbitration in light of its speed, simplicity, and inexpensiveness. Justice Gorsuch found no conflict with other federal laws and dispensed with the arguments that the class waivers in arbitration agreements violated Section 7 of the National Labor Relations Act (NLRA) which protects employees’ rights to engage in “concerted activities” in pursuit of their “mutual aid or protection.”

In upholding the validity of the arbitration agreements in all three consolidated claims, the Court held that employers do not violate the NLRA or the Federal Arbitration Act (FAA) by requiring employees to sign arbitration agreements that waive their rights to bring class action suits. The Court stressed that the FAA requires that arbitration agreements be enforced just like any other contract.

Though the specific facts of Epic Systems case do not relate to an agreement to arbitrate workers’ compensation claims, the Court’s analysis and commitment to arbitration agreements generally, forecast an application in a variety of disputes between employers and employees.

Effects in Employer/Employee Relationships

The Epic Systems decision has been generally regarded as a win for employers who may be more emboldened to include broad arbitration agreements in contracts of employment. Employers may feel more assured that, if contested, such agreements will be upheld as valid and enforceable. Of course, employers must weigh the potential benefits of arbitration such as expediency and lower litigations costs against the possible downside such as limited appellate rights.

That being said, surely this decision will impact the employer/employee disputes related to workplace conditions including those claims typically brought under the Fair Labor Standards Act, Title VII of the Civil Rights Act, and the Family Medical Leave Act as employees often seek to litigate these claims in a collective front.

Arbitration in New Jersey

The question we now face is how far the high Court might go to endorse arbitration agreements and whether that preference will change the landscape of employment contracts in New Jersey.

There is no question that arbitration is a favored means of dispute resolution in federal court. Pursuant to the Federal Arbitration Act, agreements requiring arbitration of certain disputes are to be enforced in the same manner and to the same extent as any other contractual provision. Indeed the FAA was passed by Congress “to reverse the longstanding judicial hostility to arbitration agreements … and to place arbitration agreements on the same footing as other contracts.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991) (wrongful firing claim under ADEA subject to arbitration agreement).

Despite this clear directive under the FAA, in New Jersey, state courts have been fairly hostile to arbitration agreements and previously refused to enforce agreements that did not provide adequate notice of an individual’s right to sue, seek a jury trial, or file a class action law suit. Conversely, the Third Circuit has towed the line and has regularly upheld agreements to arbitrate.

Will Arbitration Replace Workers Compensation In New Jersey?

Despite the Supreme Court’s commitment to the validity of arbitration agreements and the FAA’s preference for arbitration as the favored means of dispute resolution, absent some legislative directive, it is unlikely that arbitrations will replace the workers’ compensation system in New Jersey.

First, New Jersey’s workers’ compensation scheme is statutory and Section 39 of the statute expressly declares that employers cannot limit an employee’s right to pursue workers’ compensation claims in New Jersey. Section 39 states that any “agreement, composition, or release of damages made before the happening of any accident” is contrary to public policy. This language appears specifically crafted to address agreements to arbitrate or agreements to completely waive the right to pursue a workers’ compensation claim.

However, the question remains whether the Federal Arbitration Act would supersede state law and allow arbitration to displace workers’ compensation claims. Indeed, two recent Supreme Court cases of AT&T Mobility v. Concepcion, 563 S. Ct. 333 (2011) and Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017) have upheld agreements to arbitrate in the face of contrary state common law and emphasized that the FAA permits arbitration agreements to be declared unenforceable ‘upon such grounds as exist at law or in equity for the revocation of any contract’, e.g. fraud, duress, unconscionability.

Nevertheless, not only would it be a stretch to conclude that the arbitration agreements could be used to circumvent an entire statutory scheme designed as remedial legislation, such a challenge might take a lifetime of litigation to obtain final judicial guidance on the issue.

Potential Indirect Effects in New Jersey

Even if New Jersey’s workers’ compensation system is not replaced with valid agreements to arbitrate, the preference for arbitration may have indirect effects. Such effects might be felt in third party litigation, typical of motor vehicle accidents and slip and falls, when an injured worker files a civil action in connection with the work-accident. As it currently stands, it is unlawful for employers to require waivers of third party claims. Vitale v. Schering–Plough Corp., No. 078294, 2017 WL 6398725 (N.J. Dec. 11, 2017) In Vitale, the New Jersey Supreme Court relied on Section 39 of the workers’ compensation statute to find that a waiver signed by an injured worker prior to the compensable accident was invalid. In light of the US Supreme Court’s decision in Epic Systems, it remains to be seen whether an agreement limiting third party claims to arbitration would be treated the same as an all-out waiver.

Another application of arbitration one may envision relates to employers with multi-state employees. Though Epic Systems dealt with arbitration agreements, it also underscored the Court’s preference to allow employers and employees to freely contract between themselves. Indeed the opening line of the majority decision reflects this philosophy when Justice Gorsuch asks “[s]hould employers and employees be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?”  Applying this reasoning to multistate employees, it is not unimaginable for a court to validate choice of law or choice of venue agreements in employment contracts that commit to litigate work-related injuries in particular states and/or venues.


The Courts’ decision in Epic Systems does not directly threaten to undermine the workers’ compensation statutory scheme in New Jersey. However, the Court’s decision does represent a broader affirmation and commitment to the validity of arbitration agreements. It appears New Jersey’s workers’ compensation statute is on solid footing in its proscription of agreements subversive to the statute’s remedial purpose. However, it is unclear what indirect effects we can expect for employers and carriers alike.

The Gig Economy and Employment Classification

Using a taxi to get from point A to point B is changing. All you need is a smart phone and a destination. Click on an app and within minutes a driver will arrive at your location and take you wherever you want to go. Uber and other “ride-sharing” companies such as Lyft have completely disrupted the taxicab industry. While there are several companies in this market, Uber is winning the race. The business model is structured around a network of individuals who use the company’s software to locate customers and facilitate payment (with a commission going to Uber or Lyft).

While our focus here is primarily on Uber and “ride-sharing” platforms, this type of arrangement is not limited to transportation. Lately, there has been an explosion of companies, websites, and apps that fall into what is often referred to as the “gig economy.” Task Rabbit and Gig Walk (handyman and odd job services), Postmates (food delivery), and Rover (dog sitting) are just a few of the many start-ups getting in on the action. The premise is generally the same throughout: individuals use a company’s app and software to connect with others who are willing to provide various services for a fee, whether it is fixing a sink, delivering groceries, or walking a dog.

For the purposes of the New Jersey’s Workers’ Compensation Act the question before us is whether these individuals, Uber drivers for example, work for Uber as employees or are in fact independent contractors. Put simply, if a driver is injured on the job can he/she file a successful claim for workers’ compensation benefits, or is that driver precluded from such benefits because there is no employment relationship?

New Jersey Employee Classification

For years, New Jersey’s case law regarding employment classification tilted toward establishing an employment relationship, which opened up the benefits and protections of New Jersey’s Workers’ Compensation Act for multitudes of workers. Determining employment status in New Jersey has always been a fact-based inquiry with courts primarily focused on two analyses: the relative nature of the work and the right to control.

The “relative nature of the work” test considers the economic dependence of the worker upon the business and whether the work performed is an integral part of the business.  For example, in Re-Max v. Wausau Ins. Cos. 162 N.J. 282 (2000), in addition to considerations of control, the New Jersey Supreme Court looked to the nature of the work itself and held that Re-Max real estate agents were indeed employees for the purposes of the Workers’ Compensation Act.  The Court reasoned that the nature of Re-Max’s business is dependent upon the services of real estate agents. Without the agents, the company simply cannot survive.  The court also pointed to the fact that the agents were required to work exclusively with Re-Max and were, therefore, economically dependent on the company.

The “control test” on the other hand evaluates the company’s right to control the manner and means of the work performance – what should be done and how it should be done.  This is a case specific inquiry that considers factors such as whether the company supplies equipment and materials, directs the individuals on how to perform the tasks, requires uniforms, provides insurance, solicits customers, et cetera. Typically, the petitioner in a workers’ compensation case does not need to satisfy both tests. Employment may be established if either the relative nature of the work test or the control test has been met.

Recent case law has begun to erode the trend toward finding employment and reshaped the analysis for determining a workers’ employment status.

Estate of Kotsovska v. Liebman

The New Jersey Supreme Court case of Estate of Kotsovska v. Liebman, 221 N.J. 568 (2015) involved an unfortunate set of facts where a woman contracted as a home aide was tragically killed in a motor vehicle accident by the 80 year old man for whom she provided services. On appeal, the Court addressed the issue of Ms. Kotsovksa’s employment status and in doing so, endorsed a hybrid test and the use of twelve key elements to consider in a workers’ compensation case. The test encompasses both the right to control and the relative nature of the work tests.

The twelve elements addressed by the court are:  (1) the employer’s right to control the means and manner of the workers’ performance; (2) the kind of occupation — supervised or unsupervised; (3) skill; (4) who furnishes the equipment and workplace; (5) the length of time in which the individual has worked; (6) the method of payment; (7) the manner of termination of the work relationship; (8) whether there is annual leave; (9) whether the work is an integral part of the business of the “employer”; (10) whether the worker accrues retirement benefits; (11) whether the “employer” pays social security taxes; and (12) the intention of the parties. The court also considered the workers’ economic dependence on the work relationship.

It is important to add that Kotsovska was filed as a negligence claim in Superior Court, rather than as a workers’ compensation claim – presumably because Ms. Kotsovska had no dependents. Addressing a rather specific issue before the Supreme Court, the Court held that when there is a genuine dispute over the worker’s employment status and a plaintiff elects to file a claim in New Jersey Superior Court – Law Division, the Superior Court has concurrent jurisdiction to resolve the issue. This holding set the stage for the Court’s endorsement of the employment classification test above. Ultimately the Court found the jury charge provided by the trial court was sufficient to allow the jury’s award of damages to stay.

Babekr v. XYZ Two Way Radio

More recently, the Appellate Division in Babekr v. XYZ Two Way Radio, A-3036-13T3 (App. Div. August 6, 2015) utilized this hybrid approach to find no employment relationship and thus no benefits under the Workers’ Compensation Act. While this case is unpublished, courts may look to it as persuasive. The relevant facts of Babekr illustrate how companies such as Uber and Lyft may find themselves in a similar situation if forced to litigate the issue of a workers’ employment classification.

XYZ Two Way Radio (“XYZ”) was a limousine company comprised of approximately 430 individual drivers who each owned shares in the company. Mr. Babekr, a driver, was injured in a motor vehicle accident while performing his job – a job he had done for over 20 years. Mr. Babekr was free to work whenever he wanted and used his own car to chauffer passengers. He also paid his own insurance and there was no indication he was reimbursed for gasoline or repairs. Mr. Babekr and other drivers were part of a list of drivers – a sort of, “available driver” list. After a driver took a fare he/she was placed at the bottom of the list.

XYZ, for its part, provided Mr. Babekr and other drivers an in-car computer to help locate passengers in their respective geographic regions. Importantly, Mr. Babekr did not need to use this computer and could solicit his own fares from would-be passengers.  Also, Mr. Babekr was free to turn down fares coordinated through XYZ, but if he did, he was marked as “unavailable” for 30 minutes and was placed at the bottom of the “available driver” list.

As mentioned, in finding Mr. Babekr was an independent contractor and not an employee, the Appellate Division walked through each factor and determined there was insufficient control over Mr. Babekr to establish an employment relationship. Among other facts, the court reasoned that Mr. Babekr was working for XYZ for 20 years, made his own schedule, did not receive benefits, could freely turn down fares, paid his own insurance, received a percentage of the fare, and did not need to use the XYZ computer to solicit and obtain fares

Additionally, and perhaps most importantly, with regard to the relative nature of the work, the court found that Mr. Babekr was not necessarily an integral part of the XYZ business. Though XYZ, as a transportation company, relied upon drivers generally, the court noted that Mr. Babekr himself was not critical to the operation of XYZ’s business. If he were not available to take a fare, the next driver on the list would be given that opportunity. The company would not miss a beat without him.

This is a subtle but important distinction from the New Jersey Supreme Court’s reasoning in Re-Max v. Wausau Ins. Cos. where the court noted that the Re-Max business model relied upon the real estate agents generally; without agents the company could not function. Despite this difference, the New Jersey Supreme Court recently denied the Petition for Certification.

Uber and Beyond

In many ways, Uber’s business model resembles that of XYZ, even though Uber specifically identifies itself as a technology company and asserts that drivers pay Uber to use its software. In light of the Babekr decision and New Jersey courts trending away from finding employment, Uber drivers making an application for workers’ compensation benefits in New Jersey may face the same uphill battle that Mr. Babekr faced. Applying the twelve factors of the Babekr case to a typical Uber driver, it appears the scales may tip in Uber’s favor and away from employment.

Uber insists the drivers are independent contractors: they can make their own hours; are free to refuse a fare; use their own car; pay their own auto insurance (at least when there is no fare in the car); and like Mr. Babekr, Uber drivers do not receive benefits. Also, Uber drivers are free to have other sources of income and many drivers use Uber as a side job to make extra money. However, because this is a fact sensitive inquiry there are contrary arguments to be made for employment. For example, Uber pays for insurance when the driver has a fare in the car; Uber sets the rates; drivers use Uber’s software to locate passengers, and similar to the Babekr case, the passengers pay directly to Uber and the driver receives a percentage (with Uber, the driver receives approximately 70-80% of the fare).

With regard to the relative nature of the work, as in Babekr, there is no one Uber driver whose availability can make or break the company. If you have ever used Uber’s services you may know this first hand. If one driver is unavailable or chooses not to take a fare, the passenger has the option of choosing a different driver by simply tapping an icon in the app.

Whether or not a New Jersey workers’ compensation court would determine that Uber drivers, and other participants in the “gig economy,” are independent contractors remains to be seen. What we can tell is that each case will require its own analysis with the court evaluating all twelve factors and the economic relationship between the company and the worker.

While the focus here has been on Uber and “ride sharing” in light of the obvious factual similarities in Babekr, the application of Babekr and Kotsovska extends well beyond the transportation industry and the internet’s “gig economy.” Litigation surrounding employment classification is nothing new. Determining whether a worker is an independent contractor or an employee has been a contested issue for years. Whether the worker repairs houses, walks dogs, cleans pools, or provides transportation services, the hope is that New Jersey’s recent case law can provide some clarity to the issue of employment classification, particularly in the Workers’ Compensation setting for all affected, whether companies, workers, legal practitioners, or insurance carriers.