The U.S. Department of Labor estimates 56 percent of all nonunion private-sector employees are subject to mandatory arbitration agreements. Many employers use such agreements—and the class action waivers contained therein—to mitigate the risks of class and collective actions. The Federal Arbitration Act (FAA) applies to most arbitration agreements and explicitly provides that such agreements are generally valid and enforceable.

However, “transportation workers” are exempt from the FAA, and as a result, arbitration agreements with transportation workers cannot be enforced under the FAA. Increasingly, plaintiffs’ lawyers are attempting to avoid the enforcement of arbitration agreements signed by their clients by arguing their clients are transportation workers and therefore the signed arbitration agreements cannot be enforced under the FAA.

A recent flurry of cases interpreting the “transportation worker exemption” expands the scope of the exemption and therefore increases the number of workers to whom the FAA does not apply. As a result, employers that have arbitration agreements with workers who may be considered within the scope of the exemption may want to update their agreements.

Quick Hits

• Recent case law expands the types of workers exempt from the FAA.
• Even if the FAA does not apply, an arbitration agreement may be enforceable under state law, but only if the agreement is worded properly.
• Employers may want to update their arbitration agreement if it will be used with workers who might be considered transportation workers.

The Latest Rulings and an Emerging Trend

Recent court rulings expand the scope of workers who may be considered transportation workers. On April 12, 2024, the Supreme Court of the United States held the exemption is not limited to workers in the transportation industry; rather, according to the Supreme Court, when determining whether a worker fits the transportation worker exemption, the proper focus is on the worker’s job duties.

Shortly thereafter, on April 22, 2024, the Supreme Court denied a request to review another transportation worker case. In Domino’s Pizza LLC v. Carmona, the Ninth Circuit Court of Appeals ruled drivers who deliver ingredients to California restaurant locations from a supply chain center also in California are transportation workers and therefore exempt from the FAA. The Supreme Court’s decision not to consider the case leaves in place the Ninth Circuit’s ruling.

In March 2024, the Ninth Circuit issued another ruling effectively expanding the scope of the transportation worker exemption, finding warehouse workers who move goods only through a warehouse are nonetheless sufficiently engaged in interstate commerce to fit the exemption. The appellate court reasoned that while such workers move goods only a relatively short distance within a single state and indeed within a single warehouse, they do so with “the direct purpose of facilitating their continued travel through an interstate supply chain.” The deadline for the employer to file its request for the Supreme Court to review the case is June 10, 2024, and to date, the employer has not done so.

Updating Arbitration Agreements in Light of the Evolving Case Law

On the one hand, if a court finds an arbitration agreement is unenforceable under the FAA, the employer is not in a materially worse position than if it had never entered the arbitration agreement in the first place. On the other hand, in order to achieve the benefits of arbitration, many employers want to try to have enforceable arbitration agreements with all workers, including any that may be considered transportation workers.

Such employers may want to consider three issues. First, even when the FAA does not apply, arbitration agreements—even those with transportation workers—may be enforceable under state law. However, some arbitration agreements provide that they are governed exclusively by the FAA, without any reference to state law applying if the FAA does not apply. A court may decline to consider the enforcement of an arbitration agreement under state law in such circumstances.

Second, state law varies wildly on the enforceability of arbitration agreements and is changing with increasing frequency. While the FAA generally preempts state anti-arbitration statutes, such state laws become more relevant when the FAA does not apply. Therefore, employers may want to evaluate whether their arbitration agreement can and should have a backup choice-of-law provision, should the FAA be held to not apply.

The third issue for consideration involves the use of arbitration agreements with independent contractors. The Ninth Circuit recently held that the FAA’s transportation worker exemption does not apply to entities but rather only to individuals. Companies that retain as contractors individuals who may be considered transportation workers may want to evaluate whether they should insist on such individuals forming an entity and then contracting with the entity rather than the individual. In addition to possibly rendering the transportation worker exemption inapplicable, contracting with an entity would buttress the likelihood of the contractor classification being upheld.

Next Steps

It is likely that plaintiffs’ lawyers will continue to test the boundaries of the FAA’s transportation worker exemption to attempt to avoid enforcement of agreements their clients signed. It is unclear when the Supreme Court will have another opportunity to clarify the types of workers and the types of job duties that would fit the exemption. In the meantime, given the flurry of activity around the FAA’s transportation worker exemption, employers may want to reassess their arbitration agreements, particularly with any worker who might arguably be considered a transportation worker.