Supreme Court FAA Decision Creates Even More Questions About Independent ‎Contractors and Arbitration

From JDSupra, Richard Reibstein discusses a recent United States Supreme Court case in which the Court interpreted the exemption in the Federal Arbitration Act (FAA) for workers “workers engaged in foreign or interstate commerce” to include workers even if they did not work for in the transportation industry. Richard writes:

Is an independent food distributor exempt from an arbitration agreement under the interstate transportation worker exemption in the Federal Arbitration Act (FAA)? That was the question that the U.S. Supreme Court addressed in its April 12, 2024 opinion involving a distributor of products manufactured by a baked goods company. In its opinion, the Supreme Court made it clear that a worker need not provide services to a company in the transportation industry to be considered an interstate transportation worker; to the contrary, it ruled that an individual can provide services to a company in an industry other than transportation and still invoke the interstate transportation worker exemption. But that only answered the threshold question about the scope of the exemption, leaving a very fact-specific inquiry for lower courts to address: in what activities must the worker be engaged in order to be considered an interstate transportation worker under the FAA, and to what extent must the worker be involved in such activities? The Supreme Court’s test for the availability of the exemption, explained below, will create years of litigation in the lower courts and a great deal of uncertainty. Fortunately, for companies that face these issues, such uncertainty can be averted by drafting arbitration agreements that rely on state arbitration laws in addition to the FAA. Effective and well-drafted arbitration agreements are one of the tools businesses have utilized to minimize independent contractor misclassification exposure from class actions. They remain an essential part of a compliance process such as IC Diagnostics (TM), which is used by an increasing number of savvy companies to manage their IC relationships.

In the Courts (5 cases)

SUPREME COURT DECISION ON FAA ARBITRATION EXEMPTION CREATES UNCERTAINTY FOR BUSINESSES USING IC’S WHOSE ACTIVITIES INCLUDE DRIVING. The U.S. Supreme Court has decided that a transportation worker need not work for a company in the transportation industry to be exempt from arbitration under Section 1 of the FAA. Section 1 of the FAA, sometimes referred to as the “interstate transportation worker exemption,” exempts “contracts of employment of…any other class of workers ‎engaged in foreign or interstate commerce.”‎ Two distributors for Flowers Foods, Inc., a nationwide producer and marketer of baked goods, brought a putative class action claiming that Flowers and an affiliate had misclassified them as independent contractors instead of employees. The lawsuit alleges the plaintiffs were underpaid in violation of the Fair Labor Standards Act and state law by virtue of defendants’ alleged actions in making unlawful deductions from their wages, failing to pay overtime compensation, and requiring the distributors to pay for distribution rights and operating expenses. The two distributors owned the rights in certain parts of Connecticut to distribute the company’s products to store accounts and their own customers. The company made a motion to compel arbitration because the agreements with the distributors contained an arbitration clause. Although the distributors argued that they fell within the interstate transportation worker exemption to the FAA and therefore could not be compelled to arbitrate because a part of their activities included driving, the district court dismissed the case in favor of arbitration. The U.S. Court of Appeals for the Second Circuit affirmed the decision on the ground that the two distributors were in the baking industry, not the transportation industry, and therefore did not qualify for the arbitration exemption.

The Supreme Court vacated the judgment of the Second Circuit. It concluded that there is no requirement that a transportation worker must only work for a company in the transportation industry to be exempt under Section 1 of the FAA. It stated that the exemption for such workers depends on “what they do, not for whom they do it.” The Court continued: “a transportation worker is one who is “actively” “‘engaged in transportation’ of . . . goods across borders via the channels of foreign or interstate commerce.” The Court tried to explain its test by stating that an exempt worker “must at least play a direct and ‘necessary role in the free flow of goods’ across borders.” What does that mean? Lawyers will debate for years the meanings of the words “actively,” “across borders,” and “necessary role,” and slight differences in facts may well result in different determinations for similar types of workers who drive, transport, or handle goods that originate from out of state. Although the Court expressly stated that it was not reaching the merits of the Section 1 exemption as applied to the facts in this case, there are compelling arguments that these types of distributors, who operate on a direct store door (DSD) basis, do not generally transport goods in interstate commerce and do not actively engage in transportation activities. Rather, driving is incidental to their primary responsibilities – to sell goods to stores and service those stores’ needs for such products. Bissonnette v. LePage Bakeries Park St. LLC, No. 23-51 (Sup. Ct. Apr. 12, 2024).

Shortly after this decision was issued, the publisher of this blog was quoted at length in an April 15, 2024 article entitled “Arbitration Carveout’s Scope to Turn on Where Line is Drawn” by reporter Jon Steingart in Law360 Employment Authority. Our publisher noted that “the biggest issue with the high court’s decision is that its precedent tees up more litigation by using terms without defining them.” He also explained: “[A] court finding that someone is exempt from the FAA doesn’t mean their arbitration agreement is unenforceable….In any event, state arbitration laws continue to provide an alternative basis for a court to compel arbitration of employment and independent contractor claims….As is often the case in contract law, an agreement’s wording matters a lot….Attorneys should carefully draft an arbitration agreement, so they don’t unintentionally close the door to enforcement under state law, such as by including a statement that the arbitration provisions ‘will be governed solely by the Federal Arbitration Act.’”

Read the full story at Supreme Court FAA Decision Creates Even More Questions About Independent ‎Contractors and Arbitration: April 2024 IC Legal News Update‎ | Locke Lord LLP – JDSupra

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