Supreme Court Unanimously Rules that the Federal Arbitration Act Does Not Apply to Contracts of Employment of Certain Transportation Workers

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On January 15, 2019, the Supreme Court unanimously ruled in New Prime Inc. v. Oliveira, 528 U.S. __, that the Federal Arbitration Act (“FAA”) does not apply to disputes involving contracts of employment of certain transportation workers, including independent contractors.

New Prime Inc. is an interstate trucking company, and Mr. Oliveira was one of its drivers who worked under an operating agreement that calls him an independent contractor and contains a mandatory arbitration provision. Oliveira filed a class action alleging that New Prime denies its drivers lawful wages. New Prime asked the court to invoke its statutory authority under the FAA to compel arbitration. Oliveira countered that the court lacked authority because Section 1 of the FAA does not apply to disputes involving “contracts of employment” of certain transportation workers. New Prime insisted that any question regarding Section 1’s applicability belonged to the arbitrator alone to resolve, or, assuming the court could address the question, that “contracts of employment” referred only to contracts that establish an employer-employee relationship and not to contracts with independent contractors. New Prime lost before the Court of Appeals, and the United States Supreme Court granted a writ of certiorari to resolve a split among Circuits around the nation.

Justice Gorsuch, writing for the unanimous Court (excluding Justice Kavanaugh, who was not involved in the case or ruling), held that transportation employment contracts are excluded under the FAA, regardless of whether the contract purports to establish an independent contractor or employer-employee relationship. Relying on case law and statutory language in place when the FAA was enacted in 1925, the Court held that the term “contracts of employment” refers to “nothing more than an agreement to perform work.” Thus, any transportation employment contract is precluded from arbitration under the FAA, regardless of whether the employee is labeled as an “employee” or “independent contractor.”

Further, this preclusion cannot be overcome by an arbitration agreement containing a delegation clause (e.g., a clause requiring the issue of arbitrability to be determined by the arbitrator, not the court). The Court held that Section 1’s exclusion of certain contracts is a threshold issue to determining a court’s authority to compel arbitration. Thus, the fact that an arbitration agreement is clear does not confer judicial authority to compel arbitration of contracts specifically excluded from the FAA’s statutory reach. Therefore, courts lack authority to compel arbitration in disputes arising under transportation employment contracts, regardless of a contract’s explicit agreement to resolve disputes through arbitration.

While the ruling in New Prime can be viewed narrowly as only affirming that the FAA does not apply to transportation employment agreements, the practical result of the ruling has a much broader impact. Transportation contracts between motor carriers and independent contractors will no longer be subject to arbitration under the FAA. This is likely to lead to a significant increase in the number of lawsuits filed in federal court by independent contractors claiming, as Mr. Oliveira did, that they have been misclassified by their employers. Congress, and various state legislatures, have made it apparent that action is not going to be taken to protect the independent contractor model within the transportation industry. Given the Court’s ruling in New Prime, transportation companies that employ independent contractors should re-evaluate their contracts and relationships with those workers and consider whether contracts need to be amended to address the issues raised by New Prime. A state-by-state evaluation of arbitration rules may be necessary for some carriers to determine whether state law arbitration rules will still apply to their contracts with workers. For some companies, a different labor model may ultimately need to be considered.

 

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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