In a recent opinion, the Third Circuit ruled that an arbitrator, not a state or federal judge, should decide claims raised by workers alleging that they were mischaracterized as “independent contractors” in violation of the New Jersey Wage Payment Law (“WPL”), N.J.S.A. § 34:11-4.1 et seq.

By way of background, Defendant, Coverall North America Inc. (“CNA”) is an entity that sells commercial cleaning services. It operates a franchise business system through geographically designated territories. Defendant, Sujol, LLC is a master franchisee that owns one of these territories and has the right to sell franchises using CNA’s trademarks and operating system. Sujol entered into separate agreements with plaintiffs, Richardson and Silva to operate cleaning businesses.

In 2017, plaintiffs filed a putative class action suit in the Superior Court of New Jersey, alleging that their relationship with Sujol violated the WPL. Plaintiffs alleged that they were misclassified as independent contractors, improperly charged for jobs, and unlawful deductions were taken from their wages. CNA and Sujol removed the matter to the District Court of New Jersey and then moved under Section 3 of the Federal Arbitration Act to stay the proceedings in favor of arbitration.

The Third Circuit partially reversed a district court decision, which allowed some claims to proceed in court and sending other claims to an arbitrator to resolve arbitrability issues. The Court applied a two-step process to evaluate the arbitration clause in the agreements: a) whether there is a valid agreement to arbitrate; and b) whether that agreement covers the dispute at issue.

The Court ruled in favor of defendants’ position. Incorporation of the American Arbitration Association (“AAA”) rules in Silva’s arbitration clause “constitutes clear and unmistakable evidence that the parties agreed to delegate arbitrability.” Silva’s agreement states “all controversies, disputes or claims between Coverall . . . and Franchisee . . . shall be submitted promptly for arbitration” and that “[a]rbitration shall be subject to . . . the then current Rules of the [AAA] for Commercial Arbitration.”

The court rejected plaintiffs’ argument that relying on incorporated rules is unreasonable in agreements involving “unsophisticated parties.” Adopting that argument would amount to disregarding the “clear and unmistakable” standard the court was required to follow. As a result, the Third Circuit reversed and remanded this issue to the District Court.

As for plaintiff, Richardson, the court reversed and remanded the District Court’s finding that CNA, as a third party beneficiary of the agreement between Sujol and Richardson, could not enforce the underlying arbitration clause. The court noted that some of the issues concerning Richardson were raised for the first time on appeal and others only arose before the District Court in a cursory manner. The District Court was in the best position to decide these issues in the first instance.

This decision represents a victory for parties to a franchise agreement, who seek to enforce their right to privately arbitrate disputes instead of engaging in state or federal court litigation.