A Staffing Company’s Employee Arbitration Agreement Can Also Protect Its Clients

January 3, 2019 | By

Many companies require their employees to sign agreements to arbitrate any employment disputes, including claims for wages and overtime pay under the Fair Labor Standards Act (“FLSA”) and similar state laws.  These agreements often include a waiver of the employee’s right to participate in class or collective actions against the company.  As recently covered by HR Legalist, these types of agreements were upheld by the U.S. Supreme Court in a 2018 decision, Epic Systems v. Lewis.

In Berryman v. Newalta Environmental Services, Inc.,[1] [pdf] decided in November of 2018, the U.S. District Court for the Western District of Pennsylvania held that an arbitration agreement between a staffing agency and its workers can also cover the agency’s client company — if the agreement contains the right language.  In June of 2018, Chris Berryman filed a complaint against Newalta Environmental Services, Inc. (“Newalta”) on behalf of himself and other similarly situated workers, alleging that they were misclassified as independent contractors and were entitled to overtime pay.  Although Berryman worked on one of Newalta’s projects in 2017, his services were provided through a staffing company called Smith Management and Consulting, LLC (“Smith Management”).  Nevertheless, Berryman only sued Newalta, arguing that it was a joint employer under state and federal law, and therefore owed him overtime.

Newalta filed a motion to dismiss the lawsuit, and to compel arbitration based upon an arbitration agreement entered into between Berryman and Smith Management.  In the arbitration agreement, Berryman agreed to arbitrate all disputes, claims or controversies not only between Berryman and Smith Management, but also “arising out of or relating in any way to the services or work” that Berryman performed “for or on behalf of any client of [Smith Management].”  The Court held that Newalta was a third-party beneficiary to that agreement, because the claims covered under the agreement expressly included those arising out of or relating to the services or work Berryman performed on behalf of Smith Management’s clients, and because the agreement further stated that “[a]rbitration shall apply to any and all Covered Claims, whether asserted by [Berryman] against [Smith Management] and/or … against any Company Client.”  This was the case even though Newalta was not mentioned by name in the agreement.  The Court granted Newalta’s motion to compel arbitration and stayed the litigation pending the outcome of the arbitration proceeding.

Berryman is a reminder that a variety of different types of employment claims can be filed on behalf of workers that provide services to a company, even if the company refers to them as independent contractors, does not maintain them on its payroll, and does not believe that they are employees.  However, the risk of litigation can be mitigated through proper planning and due diligence.  Companies should carefully consider these issues whenever they engage the services of a staffing agency, and should carefully review all applicable agreements, especially if they have a policy or preference to arbitrate all employment disputes, or if they wish to have the staffing agency defend and indemnify them for employment-related claims.

[1] No. 2:18-cv-793 (W.D. Pa. Nov. 1, 2018).

The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.