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Client company was third-party beneficiary of temp’s arbitration agreement with staffing agency

By Brandi O. Brown, J.D.

In a lawsuit brought by a technician who was placed to work with the defendant client company by a staffing agency, a federal district court in Pennsylvania granted the defendant’s motion to compel arbitration of the tech’s FLSA and state-law claims for unpaid overtime wages. Reviewing the validity of the agreement under Texas law, as called for by the contract, the court concluded as a matter of law that the client company had standing to compel arbitration based on its status as a third-party beneficiary of the arbitration agreement between the tech and the staffing agency. The claims made by the temp fell within the scope of that agreement, and the defendant did not waive its right to compel arbitration. The court granted the motion to compel, stayed the action pending arbitration, and dismissed the defendant’s third-party complaint against the staffing company (Berryman v. Newalta Environmental Services, Inc., November 1, 2018, Fischer, N.).

Overtime suit. During his short stint working as a Solids Control Technician for Newalta Environmental Services, Inc., where he was placed by Smith Management and Consulting, the tech alleged that he was not paid for overtime, even though he regularly worked more than 40 hours per week. He claimed he was an employee of Newalta and that it improperly classified him as an independent contractor in order to deny him overtime. He alleged that other similarly situated workers were treated the same way and that they were all entitled to overtime pay under the FLSA and the Pennsylvania Minimum Wage Act.

Newalta, however, denied being the tech’s employer and claimed that Smith, which the parties agreed was a staffing company, was his employer. It also asserted that Smith was a “third-party services provider” for it and that Smith was responsible for paying the technician. Newalta, in turn, paid Smith a daily fee for each technician it supplied. While the tech did not dispute the arrangement described by the companies, he maintained that both companies were his employers for purposes of the federal and state laws.

He filed suit against Newalta, which then filed a third-party complaint against Smith. Newalta also moved to dismiss and to compel arbitration, relying on an arbitration agreement the tech signed when he began working for Smith.

Arbitration agreement. As part of that agreement the tech agreed that all “Covered Claims” would be exclusively determined by final, binding arbitration under the FAA. That term was defined to include services or work he performed “for or on behalf of” the company or any of its clients. Those claims were defined to include claims under the FLSA and any other laws governing overtime and compensation. Under the agreement the tech (defined as a “Contractor” in the agreement) expressly waived his right to class or collective action with respect to covered claims. The governing law provision specified Texas law was to govern.

Third-party beneficiary? At the heart of the controversy was whether Newalta had standing to compel arbitration, a determination that turned on whether it was a third-party beneficiary to the arbitration agreement between the tech and the staffing company.

The court determined that the motion to dismiss standard, rather than the summary judgment standard, was appropriate here. The technician did not cite evidence outside of the pleadings, he did not request time to conduct discovery on arbitrability, he did not assert that the contract was unconscionable, and he did not argue that he did not sign or understand the agreement. Instead, he argued that Newalta was not a third-party beneficiary and that it waived its right to arbitrate, both of which were legal questions.

Referring to the ordinary principals of contract under Texas law, the court concluded that a valid arbitration agreement existed. Texas courts have addressed the issue of third-party beneficiaries in the context of arbitration agreements, the court explained, and have concluded that it is possible for a third-party beneficiary to compel or be compelled to arbitrate under contractual arbitration provisions. Intent was the key consideration and, in this case, the tech did not argue that the contract was ambiguous. Therefore, it could be interpreted as a matter of law.

Must arbitrate. Based on the language used, the court concluded, the parties clearly intended that the tech arbitrate covered claims against clients. Although the tech argued that there was no intent to make Newalta a third-party beneficiary, the court found that argument unpersuasive. To agree with the tech that only the staffing company could compel arbitration would create the “illogical” result that the tech could take covered claims to court so long as he did not name the staffing agency as a defendant, which was precisely what he tried to do. Furthermore, the claims he made fell within the scope of the arbitration agreement, and the agreement was lawful in the context of both state and federal laws.

No waiver. Finally, the court considered, and rejected, the tech’s argument that Newalta waived its right under the FAA to compel arbitration when it filed its third-party complaint against Smith. The factors required for waiver were not satisfied—the motion was timely, the merits of the tech’s claims had only been minimally contested by Newalta, its non-merits motions practice had been minimal, and the parties had not engaged in substantial discovery practice.

The court concluded that arbitration should be compelled, but rather than dismiss the case it would stay the action pending arbitration. Because all of the tech’s claims were subject to final and binding arbitration, moreover, the remaining state law claim by Newalta in its third-party complaint against Smith was dismissed without prejudice.