Supreme Court Decision in “New Prime” May Have Limited Impact on Independent Contractor Misclassification Claims, Despite Some Commentators’ Exuberance and Others’ Despair

by Locke Lord LLP
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Shortly after the issuance of the Supreme Court’s decision earlier today in New Prime Inc. v. Oliveira, some commentators have referred to the opinion as a watershed opinion preserving the right of workers including independent contractors to have their class action cases heard in court. Others have lamented the decision, worried that the Supreme Court has now foreclosed the right of companies to compel employees and independent contractor to arbitrate their workplace disputes.  But the Supreme Court’s decision may have little or no impact as to whether workers classified as independent contractors can be compelled to arbitrate their IC misclassification claims.

Why? Because the decision by the Supreme Court is limited to the Federal Arbitration Act (FAA) and turned on language found in Section 1 of that law that excludes from the FAA’s arbitration provisions several types of transportation workers that are involved in interstate commerce.  In contrast to the FAA, state arbitration laws generally do not contain an exclusion for such workers.  Thus, this decision will have little or no effect on the right of companies to compel arbitration of any worker’s dispute – whether the workers are classified as employees or independent contractors or whether the workers are involved in interstate transportation – if the company seeks to compel arbitration under a state arbitration law, instead of or in addition to the FAA.

Some lawyers representing workers – both employees and independent contractors – may argue that the federal arbitration law preempts these state laws.  But the courts have generally only found state arbitration laws to be preempted by the FAA, which is intended to promote arbitration, where a state law places some limits on arbitration – and it is likely that few if any state arbitration laws exclude transportation workers in interstate commerce.

The Two Issues Decided By the Supreme Court  

The precise issue decided first by the Supreme Court was whether a court or arbitrator should decide if a transportation worker is excluded under the FAA.  Justice Neil Gorsuch authored the decision, which concluded that the courts, not an arbitrator, should decide the exclusion issue – even when the arbitration agreement commits this issue to the arbitrator’s authority.  According to the Court’s opinion, before a court considers invoking its power to compel arbitration and “stay” the litigation under Sections 3 and 4 of the FAA, the court must determine if a worker is excluded under Section 1 of the FAA as an interstate transportation worker.  If the exclusion applies, the court will not compel arbitration under the FAA.

New Prime, an intermodal trucking company, had argued that the threshold question of whether the exclusion applied should instead be determined by an arbitrator.  In rejecting that argument, the Supreme Court stated that the parties could not bypass the interstate transportation worker exclusion in Section 1 of the FAA by agreement of the parties.  According to Justice Gorsuch:  “The parties’ private agreement may be crystal clear and require arbitration of every question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum.”

The second issue decided was whether the exclusion for “contracts of employment of . . . [transportation] workers engaged in . . . interstate commerce refers only to contracts between employers and employees or also covers contracts between companies and independent contractors.  The Court examined the meaning of the term “contract of employment” at the time the FAA was enacted in 1925.  It concluded that dictionaries at the time “tended to treat ‘employment’ more or less as a synonym for ‘work.’”  The Court also found that Supreme Court cases in the early 20th Century used the phrase “contract of employment” to describe “work arrangements involving independent contractors.”

Takeaways and Tips

Many companies utilizing independent contractors have included arbitration clauses with class action waivers in their IC agreements. More have done so following last year’s decision by the U.S. Supreme Court in Epic Systems Corp., which upheld mandatory arbitration provisions for workplace claims.

Plaintiffs’ class action lawyers regularly challenge arbitration clauses with class action waivers; they regard them as a huge impediment to their ability to vindicate worker rights, including claims asserted by workers who allege they are employees misclassified as independent contractors.  In contrast, businesses using arbitration agreements view them as a means to curtail the misuse of class actions used to exact costly settlements in circumstances where only a few members of the class truly feel aggrieved.

The effort by the plaintiff in the New Prime case was a successful challenge, but only because the worker and the company both agreed that Mr. Oliveira was an independent contractor and was engaged in the interstate transportation industry.  That invoked the exclusion in Section 1 of the FAA, which foreclosed arbitration under that federal law. But, if New Prime had instead sought to compel arbitration under a state arbitration law instead of or in addition to the FAA, it is likely to have secured a court order compelling arbitration of the worker’s claims.

Thus, the first practice pointer for lawyers is to consider predicating a motion to compel arbitration on the applicable state arbitration law, if the worker is unquestionably a transportation worker involved in interstate commerce.  If, however, the worker is not involved in the interstate transportation industry, a company may wish to base a motion to compel on both the FAA and the applicable state arbitration law.

But this strategy assumes the arbitration clause is free from other challenges.  As noted in our blog post of November 14, 2018 entitled “How to Effectively Draft Arbitration Clauses With Class Action Waivers in Independent Contractor Agreements,” which was based on our article published in Bloomberg’s BNA Daily Labor Report on November 9, 2018, plaintiffs’ class action lawyers have been very creative in their efforts to undermine efforts by companies to arbitrate cases and limit class actions.

In that blog post, we discussed in detail ten tips that can be utilized in appropriate circumstances to minimize challenges to arbitration clauses with class action waivers.  Those tips can be summarized as follows:

Tip No. 1. Any arbitration agreement with a class action waiver should specifically recite that the arbitrator is not given authority to conduct class arbitration.

Tip No. 2. Make sure the arbitration clauses can withstand unconscionability arguments.

Tip No. 3. Don’t bury arbitration clauses deep within independent contractor agreements.

Tip No. 4.  Place jury trial waivers in all capital letters, or bold type, or larger size typeface, and to state that the arbitration clause means that disputes will not be decided by a court or jury.

Tip No. 5. Avoid selecting a particular state’s law as the parties’ contractual “choice of law” if that state’s law contains an unfavorable test for independent contractor status.

Tip No. 6. Make sure the arbitration clause in an IC agreement specifically designates as third-party beneficiaries all of the clients and customers of the business.

Tip No. 7. Draft a state-of-the-art “delegation” of authority clause. The so-called “delegation” clause delegates authority to arbitrators to decide certain issues – but as we learned earlier today in the New Prime decision, not whether a worker is excluded by Section 1 of the FAA.

Tip No. 8. Keep tabs on changing laws and modify any choice of law provision in IC  agreements when there has been an unfavorable change in the independent contractor laws of the state selected as the choice of law.

Tip No. 9. Ensure your arbitration provisions are up to date, taking advantage of the newest legal developments in this area of the law.

Tip No. 10. Try to keep abreast of new statutes affecting arbitration of independent contractor and wage and hour disputes.

There are dozens of other tips that practitioners should consider to increase the odds of compelling arbitration of class action claims by workers claiming they have been misclassified as 1099ers. But perhaps the most important tip is one intended to minimize the likelihood of an IC misclassification lawsuit being brought in the first place: enhance the company’s level of compliance with applicable IC laws.

One way that many companies have sought to do so is through a process such as IC Diagnostics™, which evaluates a company’s level of compliance and, to the extent feasible, restructures, re-documents, and re-implements the independent contractor relationship, without altering the business model – all in an effort to minimize independent contractor misclassification exposure by means of a customizable and sustainable solution.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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