On January 15, 2019, the Supreme Court of the United States held that the Federal Arbitration Act (FAA) did not apply to wage claims brought by an interstate truck driver, even though the plaintiff was classified as an independent contractor.
The case, New Prime Inc. v. Oliveira, No. 17-340 (January 15, 2019), presented two narrow issues:
When a contract delegates questions of arbitrability to an arbitrator, does the court or arbitrator decide whether the transportation worker exclusion applies?
Does the phrase “contracts of employment,” as used in the FAA, refer only to contracts between employers and employees, or does it also reach contracts with independent contractors?
Although the Supreme Court ruled in favor of the worker, it did not address a key issue, namely, who qualifies as a transportation worker “engaged in foreign or interstate commerce” subject to the FAA’s exclusion.
The plaintiff was engaged by New Prime Inc., an interstate trucking company, as an independent contractor driver. Despite signing an arbitration agreement requiring that any disputes be brought in arbitration, the plaintiff filed a class action lawsuit seeking unpaid wages in the U.S. District Court for the District of Massachusetts.
New Prime Inc. responded with a motion to compel arbitration. It argued that any questions related to the enforceability of the parties’ agreement were for an arbitrator to decide, with the plaintiff arguing in turn that the arbitration agreement was unenforceable because it fell within the “contract of employment” exemption under Section 1 of the FAA. While the FAA presumes arbitration agreements are valid and enforceable unless a reason at law or equity exists for which a contract can be revoked, Section 1 excludes from the FAA’s coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The district court denied the defendant’s motion to compel arbitration, holding that the question of the agreement’s arbitrability was for the court, and not the arbitrator, to decide. The district court also concluded that the phrase “contracts of employment” did not include independent contractor agreements.
New Prime Inc. appealed that ruling to the First Circuit, which agreed that determining whether the FAA applies is a threshold question that a court decides, including whether the Section 1 exclusion applies. The First Circuit disagreed, however, with the district court and reasoned that “contracts of employment” could apply to agreements between companies and independent contractors. Significantly, New Prime Inc. did not dispute—at the trial court level or on appeal—that the plaintiff was a transportation worker “engaged in foreign or interstate commerce.”
The Supreme Court of the United States subsequently granted certiorari.
The Supreme Court’s First Holding:
Courts Decide Whether the Transportation Worker Exclusion Applies
The Supreme Court agreed with the lower courts in finding that a judge—not an arbitrator—decides whether the FAA applies, including the related issue of the transportation worker exclusion. Writing for the court, Justice Gorsuch observed:
Given the statute’s terms and sequencing, we agree with the First Circuit that a court should decide for itself whether §1’s “contracts of employment” exclusion applies before ordering arbitration. After all, to invoke its statutory powers under §§3 and 4 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or beyond the boundaries of §§1 and 2. The parties’ private agreement may be crystal clear and require arbitration of every question under the sun, but that does not necessarily mean the [FAA] authorizes a court to stay litigation and send the parties to an arbitral forum.
(Slip Op. at 4.)
The Supreme Court’s Second Holding:
“Contracts of Employment” Include Independent Contractor Agreements
The Supreme Court similarly agreed with the First Circuit that the phrase “contracts of employment,” as used in the FAA, includes contracts with independent contractors, as well as agreements between employers and employees.
This ruling was based on an extended discussion as to what “contracts of employment” would have meant in 1925, when the FAA was enacted by Congress. As Justice Gorsuch observed:
At that time, a “contract of employment” usually meant nothing more than an agreement to perform work. As a result, most people then would have understood §1 to exclude not only agreements between employers and employees but also agreements that require independent contractors to perform work.
(Slip Op. at 7.)
Although ostensibly a “win” for plaintiffs, New Prime Inc. v. Oliveira is limited to the two narrow issues discussed above.
Most importantly, the decision does not address the crucial issue of who falls within the transportation worker exclusion. In order for Section 1 to apply, the worker must be “engaged in foreign or interstate commerce,” a phrase that the Supreme Court did not address or interpret. However, the Supreme Court has previously cautioned that Section 1’s exclusion is “afforded a narrow construction” because the “plain meaning of the words ‘engaged in commerce’ is narrower than the more open-ended formulations ‘affecting commerce’ and ‘involving commerce’” that are found in other statutes. Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 118 (2001). Thus, drivers who do not cross state lines and other workers who are engaged in intrastate activities may be unaffected by the decision in New Prime Inc.
The New Prime Inc. decision also does not address the enforceability of arbitration agreements under state laws, as well as the potential impact of choice-of-law provisions. Companies seeking to develop or revise their arbitration agreements should consider consulting with legal counsel experienced in these issues.