From Lexology, Ariel D. Fenster, Ryan McCoy, and Esteban Shardonofsky discuss the recent Supreme Court case in which the Court said the Federal Arbitration Act (FAA) does not apply to independent contractors engaged by a transportation company. They write:
Arbitration of employment claims continues to be a hot topic at the Supreme Court. In a unanimous 8-0 decision yesterday (Justice Kavanaugh recused), the Supreme Court ruled in New Prime Inc. v. Oliveira that non-employee drivers engaged by a transportation company cannot be forced to arbitrate their wage-hour claims under the Federal Arbitration Act’s (“FAA”) exclusion for transportation workers engaged in foreign or interstate commerce because that exclusion covers independent contractors as well as employees.
The ruling marks a departure from the Court’s long-held stance favoring arbitration. Most notably, it may result in non-enforcement of arbitration agreements for hundreds of thousands of workers in the transportation industry, and it may also put in jeopardy any corresponding class/collective action waiver provisions. In the wake of this ruling, transportation companies should review and consider making changes to their arbitration agreements to ensure they remain enforceable (perhaps under state arbitration laws or as a function of severability clauses) despite the broad exclusion under the FAA.
Case Background and the Court’s Prior Interpretation of the FAA’s Section 1 Exception
Over the years, the Supreme Court has liberally interpreted and applied the FAA in favor of arbitration, consistently enforcing mandatory arbitration provisions at almost every opportunity. Just last week, Justice Kavanaugh wrote his first opinion for an unanimous Court in Henry Schein Inc. v. Archer & White Sales Inc., holding that courts must compel arbitration of gateway arbitrability questions whenever the agreement includes “clear and unmistakable evidence” that the parties delegated the determination of those questions to the arbitrator.
Despite the Court’s broad application of the FAA, the Act does contain several sweeping exceptions to coverage. Section 1 of the FAA excludes “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” (emphasis added). In its 2001 Circuit City Stores, Inc. v. Adams decision, the Court held that this provision does not apply to employment contracts of all employees, but is limited only to the employment contracts of transportation workers actually engaged in interstate commerce. Since Circuit City, a majority of courts have further limited the exception, ruling that it applies only to employees and does not preclude arbitration of claims by independent contractors in the transportation industry. This case gave the Court an opportunity to decide whether the FAA’s “contracts of employment” exemption also applies to independent contractor agreements.
Dominic Oliveira worked for New Prime Inc. as a truck driver, but never as a traditional employee. Instead, Oliveira signed an operating agreement classifying him as an independent contractor. Oliveira filed suit claiming he was paid significantly less than the minimum wage rate required for traditional employees. His operating agreement with New Prime contained several common arbitration-related provisions that loyal readers of this blog know are generally enforceable: first, the contract required that all disputes must be resolved through individual arbitration and second, the agreement provided that any threshold questions regarding the arbitrability of Oliveira’s claims should be decided by an arbitrator, and not the court. The second provision is typically known as a “delegation” clause.
Despite the mandatory arbitration provision, Oliveira filed a class-action lawsuit on behalf tens of thousands of other “contractors” who signed similar operating agreements with New Prime. In the lawsuit, Oliveira alleged that New Prime had misclassified him and other drivers as independent contractors to avoid paying them the federal minimum wage and other protections afforded to employees (but not contractors).
Two Questions Before the Supreme Court:
Who Should Decide Whether the Section 1 Exclusion Applies?
First, the Court was tasked with deciding who should rule on the applicability of the Section 1 exception—a court or the arbitrator? New Prime sought to enforce the terms of the agreement requiring the arbitrator to decide all issues regarding arbitrability, while Oliveira insisted that the court must first decide whether or not the FAA given the Section 1 coverage exclusion. Both the District Court and the First Circuit Court of Appeals sided with Oliveira on this question.
In affirming the First Circuit’s decision, the Supreme Court explained that a district court must make an “antecedent determination” of whether the Section 1 exemption applies to a contract before compelling arbitration. And because the question of whether the contract triggers the FAA’s coverage is within the court’s jurisdiction, the Court held that the question was non-delegable.
Does “Contracts of Employment” Also Mean Independent Contractors?
Next, the Court was tasked with determining if the FAA’s exemption for “contracts of employment” includes only traditional (read: W-2) employees or whether it also applies to independent contractors. For a unanimous Court, Justice Gorsuch wrote that while today there may be a formal distinction between “employment” and contract work, that was not true when Congress passed the FAA in 1925. Back then, “[d]ictionaries tended to treat ‘employment’ more or less as a synonym for ‘work’” and “all work was treated as employment,” whether or not “formal employer-employee or master-servant relationship” existed. To establish this historical context, Justice Gorsuch pointed to six dictionaries from the era in addition to contemporaneous statutes and rulings. Given this framework, Justice Gorsuch concluded that “[a]t that time, a ‘contract of employment’ usually meant nothing more than an agreement to perform work” and, “[a]s a result, most people then would have understood Section 1 to exclude not only agreements between employers and employees but also agreements that require independent contractors to perform work.” Justice Gorsuch also pointed out that Congress’ use of the term “workers” in Section 1 and not “employees” or “servants” suggested that it was meant to be interpreted broadly. Because Oliveira’s independent contractor agreement falls under the FAA’s exclusion for “contracts of employment” in the transportation industry, New Prime cannot compel arbitration of Oliveira’s claims and must instead now defend itself in court.