Supreme Court: Federal Arbitration Act Doesn't Apply to Transportation Independent Contractors

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HIGHLIGHTS:

  • The U.S. Supreme Court's decision in New Prime Inc. v. Oliveira substantially impacts the arbitrability of independent contractor misclassification cases in the transportation industry.
  • The Court held that a court – rather than an arbitrator – should resolve a dispute over the applicability of the Federal Arbitration Act's Section 1 exemption for "contracts of employment" of transportation workers. It also held that Dominic Oliveira's independent contractor agreement with New Prime, an interstate trucking company, falls within the Section 1 exemption from the FAA.
  • While the New Prime decision has the potential for far-reaching effects in the transportation industry, and especially for interstate transportation workers, it should not completely foreclose the ability to arbitrate disputes with transportation workers.

The U.S. Supreme Court on Jan. 15, 2019, issued its opinion in New Prime Inc. v. Oliveira, No. 17-340. The New Prime decision substantially impacts the arbitrability of independent contractor misclassification cases in the transportation industry.

The Federal Arbitration Act (FAA) does not apply to "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." 9 U.S.C. §1. This exception is commonly referred to as the "transportation workers" exception to the FAA. This narrow carve-out applies only to interstate transportation workers, as opposed to intrastate transportation workers, and diverges from the general federal policy favoring arbitration of disputes.

Supreme Court Decision

In New Prime, the Court was presented with two issues arising from an independent contractor agreement that contained an arbitration clause: 1) who should decide if a claim falls within the transportation workers exception to the FAA, a court or an arbitrator, and 2) does the transportation workers carve-out from the FAA (which refers to "contracts of employment") apply when, on the face of the independent contractor agreement, the plaintiff is not an employee? The Court answered these questions by holding: 1) that a court – rather than an arbitrator – should resolve a dispute over the applicability of the FAA's Section 1 exemption for "contracts of employment" of transportation workers, and 2) Dominic Oliveira's independent contractor agreement with New Prime, an interstate trucking company, falls within the Section 1 exemption from the FAA.

Looking to the sequencing of the relevant sections of the FAA, the Court determined that to invoke the statutory powers of Sections 3 and 4 to stay litigation and to compel arbitration, a court – and not an arbitrator – must first determine whether the contract falls within Sections 1 and 2, exempting contracts of employment of certain transportation workers engaged in interstate commerce. Only then can the court proceed to the merits of whether the Section 1 exemption applies to a particular contract.

The parties agreed that Oliveira was a "worker engaged in interstate commerce." And Oliveira assumed for purposes of the appeal that his contract with New Prime established only an independent contractor relationship. Thus, the Court keyed in on what the term "contract of employment" meant at the time of the FAA's adoption in 1925. Siding with Oliveira, the Court concluded that the term usually meant nothing more than an agreement to perform work, which would include not only employer/employee agreements but also independent contractor agreements. Therefore, the Supreme Court held that the U.S. Court of Appeals for the First Circuit was correct in determining that it lacked authority under the FAA to order arbitration of Oliveira's claims.

Takeaways and Considerations

While the New Prime decision has the potential for far-reaching effects in the transportation industry, and especially for interstate transportation workers, it is equally important to keep in mind what the Court did not determine in its opinion.

First, the Court did not reach the issue of what constitutes "interstate commerce" for purposes of applying the Section 1 exemption because the parties agreed that Oliveira was engaged in interstate commerce. The issue of who is an "interstate" transportation worker is where future litigation is likely to focus, as the courts and the transportation industry further define the scope and limits of the New Prime decision.

Second, the Court was not confronted with the issue of whether Oliveira was in fact an "employee" for purposes of his minimum wage claims because Oliveira assumed for purposes of the appeal that an independent contractor relationship existed, and the key term under the FAA is "employment" not "employee."

Third, the Court declined to look beyond the FAA at other potential avenues to compel arbitration in this case. Where the FAA does not apply, the applicable state law on arbitration will determine whether a claim is arbitrable and, if so, whether the arbitration agreement is enforceable. Thus, interstate transportation workers' claims may still be subject to arbitration under state arbitration acts and, in the absence of state statutory law, common law. Further, the determination of whether a class action waiver in an arbitration agreement would be enforceable will likely be analyzed on a state-by-state basis. The impact on state court opinions decided before the New Prime decision remains to be seen, and will likely be the subject of future court battles.

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