It is a notable decision in the ongoing tug of war between companies and workers over the use of arbitration in employment agreements. 

The issue is especially contentious in the “gig economy,” where companies like Uber, Lyft, Airbnb, Taskrabbit and many others provide part-time assignments to workers they classify as independent contractors rather than employees.

How big is the gig economy? Uber alone has 160,000 drivers in 400 cities worldwide, who transport over a million passengers each month. 

The McKinsey Global Institute reports that at least 20% of working-age men and women in the U.S. and Europe engage in independent work – that is, they work when they want and get paid by assignment. About 70% of those working gig jobs do so by choice, not by necessity.

Two drivers, Abdul Mohamed and Ronald Gillette, signed Uber’s “Software License and Online Services Agreement,” which included a provision requiring Uber drivers to submit most disputes with the company to arbitration.

The Uber agreement also said, if a driver questioned whether a dispute was subject to arbitration, that issue itself had to be submitted to arbitration.

Drivers could opt out of the arbitration agreement by notifying Uber in writing or, more recently, through the Uber smartphone app. Neither Mohamed or Gillette had done so.

Late in 2014, the men filed separate lawsuits claiming Uber had misclassified them as independent contractors and that the company had violated other employment laws.

Uber moved to compel arbitration in both lawsuits, citing the agreement the men had signed.

At trial of the consolidated cases, the U.S. District Court for the Northern District of California denied Uber’s motion.

It said the arbitration mandates were “unconscionable,” meaning they were “so one-sided as to ‘shock the conscience.’” 

One reason the provisions were unconscionable, according to the trial court, was that the wording was “hidden” in a long document. Drivers didn’t have a meaningful opportunity to reject the arbitration clause. In addition, they “likely felt at least some pressure not to opt out of arbitration despite the presence of a clear opt-out provision.”

The lower court also call “unconscionable” the clause in the agreement stating that if a dispute arose about whether a matter was subject to arbitration, that dispute itself had to be submitted to arbitration rather than decided in a court of law.

The Ninth Circuit Court of Appeal struck down these findings by the lower court.

Instead it agreed with Uber’s argument that the opt-out provision was clear and not burdensome, as demonstrated by the fact that some drivers did opt out and continued to drive for Uber.

Also, the agreement “clearly and unmistakably delegated the question of arbitrability to the arbitrator,” it noted. 

The appellate court noted that arbitrability is “an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.” In this case, Uber and the drivers had unquestionably agreed to let an arbitrator make such decisions.

One of the reasons Uber prevailed is that its agreement was carefully worded to comply with state and federal rules on arbitration, and to avoid practices that placed an unfair burden on its drivers. This legal craftsmanship is hardly surprising at a company now valued at over $62 billion, but it provides a useful benchmark for other employers.

M. Laurie Murphy