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Supreme Court Of Canada Finds Uber’s Mandatory Arbitration Clause Invalid And Paves Way For Gig Economy Class Action – Litigation, Mediation & Arbitration

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In Uber Technologies Inc. v.
Heller
(Uber), 2020 SCC 16, the
Supreme Court of Canada held that the mandatory arbitration clause
in Uber’s service agreement that prescribed arbitration take
place in the Netherlands and required drivers to pay US$14,500 up
front in administrative fees is unconscionable and therefore
invalid.

Summary

  • The Court ruled that Uber’s
    arbitration clause imposed insurmountable procedural barriers that
    rendered the driver’s contractual rights
    “illusory”.

  • In so holding, the Court made it
    clear that Canadian courts may depart from the general rule of
    arbitral referral where accessibility to arbitration is
    realistically unattainable.

  • In setting out a two-part test for
    unconscionability, the Uber decision serves as a warning
    to employers and companies that use standard-form contracts to take
    care in drafting dispute resolution clauses so as not to impose
    procedural barriers or burdens that effectively prevent parties
    from accessing arbitration.

Background

In 2017, an UberEATS driver (the “Plaintiff”)
commenced a proposed class action against Uber in Ontario. He
claimed that Uber drivers are employees under Ontario’s
Employment Standards Act, 2000 (“ESA”) and
entitled to ESA benefits. Uber brought a motion to stay the
proposed class proceeding because the Plaintiff had agreed to
Uber’s standard-form services agreement. That agreement
contained an arbitration clause that required all disputes to be
resolved through arbitration in the Netherlands, not a court (the
“Arbitration Clause”). Arbitration required that the
Plaintiff pay administrative fees of US$14,500, plus legal fees and
other costs of participation, an amount that represented most of
his annual income. The Plaintiff argued that the Arbitration Clause
is invalid because it is unconscionable and because it contracts
out of the mandatory provisions of the ESA.

Decision of the motion judge

The motion judge granted Uber’s motion for a stay in favour
of arbitration. The motion judge concluded that the ESA does not
restrict arbitration and that the arbitration agreement’s
validity had to be referred to arbitration in the Netherlands, in
accordance with the principle that arbitrators are competent to
determine their own jurisdiction. The motion judge rejected the
argument that the Arbitration Clause is unconscionable as there was
no evidence that Uber had preyed upon or taken advantage of the
driver.

Decision of the Court of Appeal for
Ontario

The Court of Appeal allowed the driver’s appeal and set
aside the motion judge’s stay. It agreed with him that Ontario
courts should decide whether the Arbitration Clause is valid. The
Court of Appeal determined, among other things, that the
Arbitration Clause amounted to an illegal contracting out of the
ESA and was unconscionable based on the inequality of bargaining
power between the parties and the improvidence of the costly
arbitration process.

Supreme Court of Canada Decision

In an 8-1 ruling, the Supreme Court of Canada dismissed
Uber’s appeal. It agreed with the Court of Appeal that courts
should decide if the Arbitration Clause was valid and found that
the Arbitration Clause is unconscionable, and therefore invalid,
with the consequence that the proposed class action may proceed to
court.

The Arbitration Act, 1991 governs the dispute

As a preliminary matter, the Court considered whether the
parties’ dispute was governed by the International
Commercial Arbitration Act, 2017
(ICAA) or
Ontario’s Arbitration Act, 1991. Writing for the
majority of the Court, Abella and Rowe JJ. held that in making such
a determination, it is necessary to focus on the nature of the
parties’ dispute rather than on their relationship. As the case
at hand concerned an employment dispute, which is not covered by
the ICAA, the Court held that the Arbitration
Act,1991
governs.

Who should determine the validity of the Arbitration
Clause?

The Court then addressed the issue of whether the court or
arbitrator/arbitral tribunal should decide the validity of the
Arbitration Clause. Drawing on its decisions in Dell Computer
Corp. v. Union des consommateurs
(2007) and Seidel v.
TELUS Communications Inc
(2011), the majority of the Court
reaffirmed that courts should refer all challenges to an
arbitrator’s jurisdiction to the arbitrator, unless they raise
pure questions of law, or of mixed fact and law that require only
superficial consideration of the evidence in the record and where
the court is convinced that the challenge is not a delay tactic or
will not prejudice the recourse to arbitration.

However, the Court created a new basis for departing from the
general rule of arbitral referral, where: (i) there is a bona
fide
challenge to an arbitrator’s jurisdiction; and (ii)
there is a real prospect that doing so would result in the
challenge never being resolved by the arbitrator.

Based on the record before it, the Court found that the
Plaintiff had made a bona fide challenge to the validity
of the Arbitration Clause, and that, given the significant
arbitration costs involved, there was a real prospect that if a
stay were granted the Plaintiff’s challenge would never be
brought before an arbitrator for resolution.

Unconscionability: a two-part test

The majority of the Court held that there are two elements
required for the doctrine of unconscionability to apply:

  1. Inequality of bargaining power
    between the parties; and

  2. A resulting improvident bargain that
    unduly advantages the stronger party or unduly disadvantages the
    more vulnerable.

In doing so, the majority rejected Uber’s argument that
unconscionability should consist of a more stringent four-part test
that would also require that the victim lack independent legal
advice and that the stronger party knowingly took advantage of the
weaker. The majority held that including these additional factors
would only distract from the unfair bargain inquiry. In the
majority’s view, the requirements of inequality and
improvidence, if properly applied, are sufficient to
strike the proper balance between fairness and commercial
certainty
.”

The majority found there was inequality of bargaining power
between Uber and the Plaintiff given (i) the significant
sophistication gap between the parties, and (ii) the finding that
the Plaintiff could not be expected to appreciate the financial and
legal implications of the Arbitration Clause.

According to the majority, the resulting bargain was improvident
because arbitration would entail administrative fees that were very
substantial for someone with the Plaintiff’s annual income and
which were also disproportionate to the size of any arbitration
award that could reasonably have been foreseen when the contract
was entered into. Effectively, the Arbitration Clause made the
substantive rights that were nominally given by the services
agreement essentially unenforceable by the Plaintiff.

In a concurring opinion, Brown J. agreed with the majority that
the appeal should be dismissed, and that the Arbitration Clause is
invalid, but, among other things, took issue with the
majority’s reliance on the doctrine of unconscionability to
reach its conclusion. According to Brown J., the application of the
unconscionability doctrine to the facts of this case is both
unnecessary and undesirable for two reasons:

  • The law already contains settled
    legal principles outside the doctrine of unconscionability, such as
    the rule of law and public policy, which courts can use to avoid
    enforcing contractual terms that, expressly or by their effect,
    deny access to independent dispute resolution; and

  • It would drastically expand the
    doctrine’s reach without providing any meaningful guidance as
    to its application, and only compound the uncertainty that plagues
    the doctrine and introduce uncertainty into the enforcement of
    contracts generally.

Côté J., the lone dissenter, found that a stay of
proceedings should be granted on the condition that Uber advances
the funds needed to initiate the arbitration proceedings. She found
that both the majority and Brown J. disregarded the concepts of
freedom of contract, party autonomy, and commercial certainty.

Implications of the Uber Decision

As a result of the Uber decision, companies that use
standard form contracts will want to be cautious in drafting
arbitration clauses to ensure that they are enforceable. Where
there is an imbalance of power between the parties, consideration
should be given to fairness and accessibility issues. For instance,
companies will want to pay attention to whether a clause mandates
dispute resolution in a particular jurisdiction and the arbitration
fees involved and consider how onerous the clause is, to ensure
that parties to the contract are not being effectively excluded
from arbitration.

The concurring reasons of Brown J. forecast the potential
commercial uncertainty that may arise as a result of the
majority’s endorsement of a two-part test for unconscionability
that eliminates the requirement that the strong party have
knowledge over the weaker party’s vulnerability. It is
foreseeable that there will be more challenges to the
enforceability of executed standard form agreements on the basis of
unconscionability.

In terms of next steps, the Supreme Court of Canada’s
decision paves the road for this gig economy class action to move
forward in Ontario’s courts, where ultimately some
determination will be made as to the classification of Uber drivers
as independent contractors or employees.

Originally published July 3, 2020.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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FlipServe Cloud Gig Model Seeks to Disrupt Traditional MSPs

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A startup called FlipServe has launched a cloud IT services platform that seeks to disrupt the traditional MSP (managed IT service s provider) market. The goal: Blend one-demand talent and cloud technologies to simplify IT services delivery for end-customers.

Similar in some ways to Uber’s on-demand talent, FlipServe’s business takes a page out of the gig economy playbook by focusing on outcome-based services delivery via on-demand access to a certified global workforce and emphasis on meeting service-level agreements, according to the statement.

Rather than paying for IT services based on output, FlipServe users pay for IT services based on measurable outcomes or business impacts they can objectively assess, the company says.

FlipServe Harnesses On-Demand IT Services Talent

The FlipServe platform will also provide opportunities to gig employees globally, the company said. Information about FlipServe’s IT associates such as their credentials and ratings will be provided to the customer. Once a task is assigned to a FlipServe associate, their progress will be tracked, and all of their activity from start to finish will be recorded for full transparency.

In some ways, the effort sounds similar to WorkMarket, the former OnForce, and other on-demand IT platforms that attempted to align IT talent with end-customer needs.

On FlipServe platform, users can select the service they want to accomplish along with its associated SLA’s and KPI’s, view the associated costs, track the progress of the service, and pay only after the service is completed to satisfaction. All services on the FlipServe platform are non-contractual.

Here’s how FlipServe works:

  1. Select a Service: The customer selects a service with clearly defined SLA’s and KPI’s. Multiple services can be purchased for a single server (e.g. monitoring, patching, and upgrade).
  2. Select Service Options: The customer chooses from three service options: Silver, Gold, or Platinum. The customer also has the option to choose hours of service for each server to minimize cost.
  3. Service Transparency: Cost associated with selected options will be shown. Customers have the ability to adjust service options to control costs. Once the selected service and service options are confirmed, a FlipServe-Certified cloud professional will be engaged, and the customer dashboard will be updated with progress on both desktops and mobile smart devices for complete transparency.
  4. Simplified Payment: Customers only pay based on the condition that the work meets defined SLAs. If work does not meet SLA, FlipServe will credit the customer’s account.

Infrastructure Services as a Service

Instead of focusing heavily on classic PC and server support, FlipServe bills itself as an Infrastructure Services as a Service (iSaaS) company offering managed services for Microsoft Azure, Amazon Web Services (AWS), and Google Cloud, according to the statement.

FlipServe’s stated mission is to democratize cloud through unparalleled transparency, flexible service offerings, non-contractual agreements and outcome-based work. Available services include cloud subscription management, day-to-day management of cloud operations, performance management, spend management, high availability and disaster recovery.

FlipServe claims to have onboarded roughly 120 customers and 60 terabytes of data so far, according to the company’s website. Still, FlipServe did not disclose whether the company’s underlying platform is home-grown or third-party software. Also, the company did not disclose how it’s funding business development.

Additional insights from Joe Panettieri.

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2021 01 20 US DOL Issues Final Rule to Simplify Analysis of Workers in Gig Economy

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A critical and growing issue facing gig economy platforms and other similar business models is the failure of existing laws to reflect the realities of a modern, adapting workforce. In response to calls for action, the United States Department of Labor recently published a final rule providing a simplified framework to determine if a worker is an “employee” or an “independent contractor” under the Fair Labor Standards Act (FLSA). The final rule, scheduled to take effect on March 8, represents the latest DOL endorsement of the gig economy platform model.

Background

In its final rule, the DOL observed that the FLSA does not define the term “independent contractor.” Instead, the DOL long ago adopted the economic realities test to determine proper worker classification. The economic realities test ultimately evaluates the extent of a worker’s economic dependence on the putative employer: the more dependent the worker is on the business, the more likely he or she could be considered an employee of that business.

The DOL noted that there has been significant confusion regarding the meaning of economic dependence and increasing legal uncertainty against the backdrop of increasingly flexible work arrangements. The DOL therefore promulgated the final rule to provide greater clarity on its own worker classification test under the FLSA.

DOL provides five factors to determine a worker’s ‘economic reality’

In its effort to clarify the confusion caused by the ever-changing meaning of the “economic reality” of a worker’s engagement, the DOL provided five factors to assess a worker’s economic dependence. Although the factors below are not exhaustive, and no single factor is dispositive, the DOL has clarified that the first two factors “are the most probative as to whether or not an individual is an economically dependent ‘employee.’” If these two factors point to the same conclusion, the remaining three factors need not be analyzed in making the classification determination.

  1. The nature and degree of the worker’s control over the work. This factor examines whether the worker exercises substantial control over key aspects of the performance of the work, such as scheduling the hours worked, selecting projects and/or being able to work for competing companies. The DOL noted, however, that even if a business required a worker to comply with specific legal obligations – such as satisfying health/safety standards and carrying proper insurance, or contractually agreed-upon deadlines or quality control standards – this alone would not constitute “control” for the purpose of this factor.
  2. The worker’s opportunity for profit or loss. This factor focuses on the extent of the worker’s opportunity to earn profits or incur losses based on (i) his or her own managerial skill, business acumen or judgment, and (ii) management of his or her investment in or capital expenditure on helpers or equipment or material to further his or her work. By contrast, if a worker “is unable to affect his or her earnings or is only able to do so by working more hours or faster,” the more likely he or she is classified as an employee under the FLSA.

If these first two factors conflict, however, the following three remaining factors can serve as further guideposts for proper classification.

3. The amount of skill required for the work. This factor examines whether the individual’s work requires specialized training or skill that the business does not provide.

4.The degree of permanence of the working relationship. This factor examines whether the relationship is impermanent (i.e., finite or sporadic) or permanent (i.e., indefinite or continuous). If a worker’s engagement falls into the former category, this would be indicative of an independent contractor relationship.

5. Whether the work is part of an “integrated” unit of production. This factor focuses on the extent the work is a component of the business’s “integrated production process” for a good or service. Significantly, in incorporating this rule, the DOL rejected the prior test’s assessment of a worker’s “integrality” – which focused solely on a worker’s “importance” or “centrality” – because it found that identifying the “‘core or primary business purpose’ is not a useful inquiry in the modern economy.” Instead, under this factor, the worker is not likely to be found to be an employee if they are not “integrated” into the business’s production process, which is composed of operational subparts working in coordination towards a “specified unified purpose.”

Also noteworthy, the DOL announced that offering health, retirement and other benefits to independent contractors in and of itself is not “necessarily indicative of employment status.” However, the DOL cautioned that offering the same benefits to both independent contractors and employees poses misclassification risks.

Will the final rule take effect?

This remains to be seen. While the final rule is scheduled to go into effect on March 8, 2021, the future of the final rule remains uncertain because the incoming Biden administration is expected to issue a directive to all agencies to delay the effective date of any pending regulation that is not yet effective. Further, under the Congressional Review Act, the Democratic majority in the Senate and House could rescind the final rule with presidential approval.

What does this all mean?

Unlike the DOL’s 2019 Opinion Letter supporting the gig economy, if implemented, the final rule constitutes binding authority that stands to alter how the DOL and adjudicative bodies analyze and ultimately classify workers under the FLSA. Although its practical impact can be limited by state laws with different and potentially more rigorous standards, the final rule represents another positive development for gig economy platforms and others businesses hampered by worker classification tests that fail to reflect, as the DOL describes it, the modern economy.

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The gig economy – a new category of worker on the horizon?

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Over five years ago, in 2015 we wrote a thought piece about the “gig economy” and where it might be headed. Given the gig economy was then only emerging as a part of the broader economy, the impacts, positive and negative, were not yet known. However, we observed that there was potential for workers and employers to successfully leverage technology as a complement or substitute for traditional ways of working.

In 2017, our colleague Ben Dudley, wrote about the continual rise and development of the gig economy. He observed that employment and industrial laws were slow to catch up with these developments but sophisticated businesses would be looking at their structures and operations to stay ahead of the movement.

Now, we come to the start of 2021.

The global pandemic has put a spotlight on gig work in a real and tangible way. On the one hand, platforms have helped us manage during lockdowns, supporting businesses to pivot to online delivery, providing work and allowing those in self isolation to access necessities. At the same time, tragically, a number of food delivery workers lost their lives on the roads, prompting the New South Wales Government to set up a taskforce to investigate the deaths and assess how to improve the safety of such workers.

The fact that contractors generally do not receive paid sick or carer’s leave was also highlighted in the pandemic response. It was reported that a number of ride-share and food delivery platforms moved to cover their partners’ lost income when required to self-isolate – to the benefit of both the individuals and their communities fighting a highly contagious virus. However, those platforms would understandably have been concerned about providing benefits associated with “employment” to those workers and potentially increasing their risk of misclassification claims.

In short, gig work and platforms are continuing to gain traction as a part of the economy, but governments have only recently recognised that the law must evolve to keep pace with them.

In the Report of the Inquiry into Victorian On Demand Work issued in June 2020, Chairperson Natalie James found a “compelling case for change” in relation to the regulation of gig work. The Inquiry’s recommendations included:

  • codifying work status in the Fair Work Act (rather than relying on “indistinct” common law tests),
  • allowing gig economy workers to bargain collectively with platforms, and
  • providing streamlined advice around work status.

The Victorian Government closed public consultations about the Inquiry’s recommendations in October 2020. It is now considering feedback on the Report.

Where to from here?

The correct classification of gig work is critical for both employers and workers because it determines the application of a broad range of entitlements and benefits. However, that issue is inherently uncertain in “borderline cases” where there are factors pointing in opposing directions.

The Fair Work Act currently applies in the main to employees, but leaves the definition of employee versus independent contractor to the common law. This requires employers to weigh up a series of factors, none of which are conclusive. In one case[1], the application of this multi-factor test resulted in a young backpacker engaged by a labour hire company to work on construction sites in Perth being found to be an independent contractor – an outcome which was queried but not overturned on appeal. One judge who sat on the appeal observed:

“It may be thought that the prevalence of trilateral relationships, the evolution of digital platforms and the increasing diversity in worker relationships has evolved in a way that the traditional dichotomy may not necessarily comprehend or easily accommodate“.

The “traditional dichotomy” between employee and independent contractor in the common law was once described by the High Court of Australia as “too deeply rooted to be pulled out”. However, with the growth of the gig economy and other innovative approaches to work it is now likely that the law will change to (at the very least) allow the provision of employment-like benefits to gig workers. There is a push to take the more radical step of defining “employment” in legislation to expand those rights and protections to gig workers. This would represent a marked shift in the law as we know it. Arguably, it could undermine the value of gig work – to provide workers with greater flexibility than traditional employment (for instance the right to set their own schedule and to accept or reject work). It would be preferable for a national approach to be taken rather than a state by state, piecemeal approach if this can be achieved. Whatever comes next, the gig economy will certainly be one of the most interesting legal and policy challenges for employment and industrial relations in 2021 and beyond.

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