March 04, 2020 Practice Points

When Are Employee Non-Signatories Bound to an Arbitration Agreement?

A company that wants to require its employees to arbitrate wage and hour disputes must have the employees sign a contract that contains an arbitration clause.

By Jessica Breuer

In Arboleda v. White Glove Enterprise Corp., et al 2020 WL 89007 (App. Div. 2d) a company attempted to require its employees to arbitrate their wage and hour claims by relying on an agreement the employees had not signed. Arboleda examines the limits on an employer’s power to require its employees to arbitrate. 

Facts

Jorge Arboleda and a class of similarly situated plaintiffs brought an action in the Supreme Court of New York, County of Queens, against defendants Sleepy’s, LLC and Mattress Firm, Inc. for numerous alleged violations of New York Labor Law Article 6. Article 6 requires employers to pay minimum wages and overtime to its employees, and employers who violate Article 6 can be held liable for both compensatory and punitive damages. Because of the potential for large damage claims and to reduce publicity and litigation costs, many companies prefer to arbitrate Article 6 claims. Defendants in the Arboleda case were no exception.

After plaintiffs’ class action was filed, defendants brought a motion to compel arbitration, arguing that the employees were bound by “Independent Owner Agreements.” These agreements included an arbitration clause that covered “[a]ny claim, dispute or controversy relating to or arising out of this Agreement . . .” However, the agreements were signed only by and between numerous defendants.

The trial judge denied the motion to compel, and the defendants appealed.   

Analysis

On appeal, the court held that while, in certain circumstances, non-signatories to a contract may be bound by an arbitration clause contained in that contract, the case at bar warranted no such finding. The court explained that non-signatories may only be bound to an agreement when the non-signatory “knowingly exploits” the benefits of the agreement. As an example of this kind of situation, the court cited Belzberg v. Verus Investments Holdings Inc., 21 N.Y.3d 626, 629, 999 N.E.2d 1130, 1133 (2013), which held that the plaintiff was bound to an arbitration agreement he did not sign, because he was a direct beneficiary of the contract that contained the arbitration clause and was seeking benefits under that contract.  

To be considered a direct beneficiary of a contract, a party must directly benefit from the agreement itself, not merely benefit from the fact that there are contractual relations between the parties. In the case at bar, the court held that the record failed to establish that the plaintiffs directly benefitted from the independent owner agreements, let alone even knew they existed. Therefore, the court upheld the lower court’s finding that the plaintiffs could not be compelled to arbitrate.

Conclusion

Wage and hour claims are frequently disputed, with new minimum wage practices changing in many of the fifty states. Arboleda stands for the proposition that a company that wants to require its employees to arbitrate wage and hour disputes must have the employees sign a contract that contains an arbitration clause.  

Jessica Breuer is an associate at Goetz Fitzpatrick LLP in New York City, New York.


Copyright © 2020, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).