The U.S. Supreme Court’s decision in New Prime v. Oliveira, No. 17-340 (Jan. 15, 2019), has added uncertainty to arbitration agreements in the transportation industry by holding that the Federal Arbitration Act (FAA) § 1 exception covers both employees and independent contractors of a trucking company.
In a unanimous opinion written by Justice Neil Gorsuch, the Court found that the 1925 vintage language of § 1 of the FAA excluding “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” applied beyond the formal employee or master-servant relationship to “agreements to perform work.”
New Prime Inc. is an interstate trucking company, and Dominic Oliveira is one of its drivers who brought a class action alleging that New Prime deprived its drivers of proper wages. The company sought arbitration to resolve the dispute. The case presented two issues. First, who should decide whether the § 1 restriction applies – a court or an arbitrator?
The opinion found the court should decide, as follows:
“ . . . a court should decide for itself whether §1’s ‘contracts of employment’ exclusion applies before ordering arbitration. After all, to invoke its statutory powers . . . 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 [of the FAA].”
This threshold determination was described by the opinion as “the necessary antecedent statutory inquiry.” And it took precedent over any arbitration delegation clause because “a court may use §§3 and 4 [of the FAA] to enforce a delegation clause only if the clause appears in a ‘written provision in . . . a contract evidencing a transaction involving commerce’ . . . [a]nd only if the contract in which the clause appears doesn’t trigger §1’s ‘contracts of employment’ exception .” Slip Op. 5.
Second, the Court examined whether the First Circuit had properly determined the § 1 issue. The opinion noted that all parties agreed that Oliveira “qualifies as a worker engaged in interstate commerce.” Slip Op. at 6. That left the meaning of “contracts of employment” at the time of the FAA’s enactment in 1925. The Court found that “contract of employment” should be given a broad interpretation. Indeed, the language “any . . . class of workers engaged in foreign or interstate commerce” confirmed the broader interpretation. “Workers,” in the Court’s view, “easily embraces independent contractors.” Slip Op. at 10.
This analysis led the Court to conclude, “[w]hen Congress enacted the [FAA] in 1925, the term ‘contracts of employment’ referred to agreements to perform work.” Consequently, the court of appeals did lack authority under the FAA to compel arbitration. The Court declined to exercise any inherent authority it had to stay litigation so the parties could pursue another dispute resolution procedure of their choosing.
Justice Ruth Bader Ginsburg filed a concurring opinion noting that Congress could also “design legislation to govern changing times and circumstances.” One wonders whether that comment was made with upcoming statutory construction cases in mind, rather than New Prime.
While New Prime resolved two important questions, it also spawned many more. Because the parties admitted that Oliveira worked in interstate commerce, what about coverage for others in the transportation industry? What about those who only travel intrastate? In Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 114-115 (2001), the Court limited the residual language to transportation workers engaged in foreign or interstate commerce.
The New Prime opinion will now compel transportation companies to consider relying on state arbitration or state contract law. One problem with a state law-based approach, however, is lack of uniformity across the states. In any event, companies should consider adding broad severability clauses in their arbitration agreements. And class and collective action waivers still are needed, even if their validity must be determined under state law.
The Bottom Line:
While New Prime resolved the question of whether both employees and independent contractors fall within the § 1 FAA exemption, it left many issues to be addressed by courts in the future.