Employers should take note of a recent ruling by the U.S. Court of Appeals for the Third Circuit in a case involving the arbitration clause in an independent contractor agreement.

The court held that the arbitration clause did not govern federal and state statutory claims asserted by an independent contractor, because the clause only covered disputes arising "under" a contract between the plaintiff and the defendant—who the plantiff claimed was her employer.

In Moon v. Breathless, Inc., the plaintiff, a dancer at Breathless Men's Club, signed a contract to rent performance space in the club. Two clauses in the contract are relevant: an employment provision and an arbitration clause. The employment provision specified that the plaintiff was an independent contractor and not an employee. The arbitration clause provided that in "a dispute between Dancer and Club under this Agreement, either may request to resolve the dispute by binding arbitration." The clause also waived class arbitration.

The clause further explained it deprived the parties of the right to litigate such claims in court or have a jury trial, and that discovery and appeal rights are limited in arbitration.

The plaintiff sued the club for violations of the Fair Labor Standards Act, the New Jersey Wage Payment Law, and the New Jersey Wage and Hour Law. The district court held that the plaintiff's claims fell within the scope of the arbitration provision. The Third Circuit reversed and allowed her claims to proceed in federal court.

The Third Circuit analyzed first whether the arbitrability of the plaintiff's claims should be decided by a court or an arbitrator, and second, whether the claims fell within the arbitration clause.

The Third Circuit held that a court should decide the question of arbitrability—whether the arbitration clause covered the substantive claims at issue. Under U.S. Supreme Court precedent, whether the parties agreed to arbitrate a certain matter is governed by state contract law. New Jersey courts have presumed that a court, not an arbitrator, decides issues concerning arbitrability, a presumption which may only be overcome by clear and unmistakable evidence in the arbitration clause. Because the clause at issue in Moon failed to mention arbitrability, let alone the venue for deciding it, and because the parties had conceded the issue before the district court, the Third Circuit determined it had the power to decide the arbitration clause scope.

The court also held that the arbitration clause did not cover the plaintiff's statutory claims. To require arbitration of statutory claims in New Jersey, arbitration clauses must identify the general substantive area covered by the clause, reference the types of claims waived by the provision, and explain the difference between arbitration and litigation.

The clause at issue in Moon fell short for several reasons. The Third Circuit found it critical that the clause referenced contract disputes, and not statutory rights, by allowing arbitration of "a dispute between Dancer and Club under this Agreement." The clause also lacked any broader language about claims related to employment or status as an independent contractor.

The Moon case provides several important takeaways for employers attempting to craft and enforce arbitration clauses. Such clauses should not be narrowly drawn to only cover disputes arising under agreements or contracts, but also should include broader language about the relationship between the parties. Arbitration clauses also should reference statutory claims; preferably explicitly, but at least by general reference. Finally, clauses should explain the differences between arbitration and litigation.

Ballard Spahr's Litigation and Labor and Employment Groups routinely assist employers with compliance and in drafting and reviewing employment and arbitration agreements.


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