On January 15, 2019, the Supreme Court of the United States of America (“SCOTUS”) ruled on 1/15/19, in a unanimous 8-0 decision, that federal courts cannot force interstate transportation workers, whether classified as employees or independent contactors into arbitration. (See New Prime Inc. v. Oliveira). The Federal Arbitration Act (“FAA”), passed in 1925, enshrined in law a strong pro-arbitration policy. Pursuant to the FAA’s requirements, federal and state courts regularly enforce arbitration agreements. But as described below, there are exceptions. Several recently decided SCOTUS cases interpret the FAA very broadly and have enforced arbitration agreements, including in the employment context. (See Epic Systems Corp. v. Lewis) However, Section 1 of the FAA excludes “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” which the Court previously ruled to include “contracts of employment of transportation workers.” See 9 U.S.C. § 1; Circuit City Stores v. Adams. Prior to New Prime Inc. v. Oliveira, lower courts interpreted the Section 1 exemption to apply only to employees and not to independent contractors.
Dominic Oliveira, a truck driver brought a class action suit against New Prime alleging that the company failed to pay him minimum wage for all hours worked. Oliveira brought the suit in federal court despite a provision in his independent contractor agreement with New Prime in which the parties agreed to arbitrate their disputes. Oliveira argued that the FAA’s exemption for “contracts of employment” for interstate transportation workers refers to all contracts to do work with employees, including those signed by independent contractors. The term “contracts of employment” was interpreted by SCOTUS according the arguments made by counsel for Oliveira, which was based upon the meaning of the words from the time of the FAA’s passage in 1925. In other words, counsel for Oliveira argued that the Court must interpret the statutory language based on what the words meant at the time the statute was passed. In 1925, when the FAA was enacted, “contracts of employment” referred generally to all agreements to perform work and included both employment agreements and independent contractor agreements. Because labor strife in the 1920s served as partial motivation for passage of the FAA, and because both employees and independent contractors can cause labor strife, it was argued that it would make no sense for them to be treated differently.
The SCOTUS decision was decided unanimously in workers’ favor. On the first issue, the Court ruled that a judge, rather than an arbitrator, should decide the applicability of the Section 1 exemption. In doing so, Justice Neil Gorsuch (writing for the majority) rejected the employer’s delegation clause argument, and instead cited the fact that Sections 3 and 4 of the FAA—which in part require a court to stay litigation and compel arbitration—are limited by the exceptions defined in Section 1 of the FAA. Thus, Justice Gorsuch reasoned that a court should decide whether the Section 1 exclusion applies before ordering arbitration. Justice Gorsuch explained that, in order to invoke its statutory powers under Sections 3 and 4 to stay litigation and compel arbitration, a court must first know whether the contract itself falls within or beyond the boundaries of Sections 1 and 2.
On the second and more critical issue, SCOTUS ruled that the term “contracts of employment” pertains to contracts with employees AND independent contractors. In reaching this conclusion, Justice Gorsuch explained that then the FAA was enacted in 1925, a “contract of employment” meant nothing more than an agreement to perform work. So, at the time, the common understanding of the Section 1 exemption meant that Section 1 applied to both agreements between employers and employees as well as agreements for independent contractors to perform work. Justice Gorsuch reinforced his decision by looking at dictionaries from the relevant time period and comparing the word “employment” as a synonym for “work;” with all work being treated as employment. Further, the Court looked at legal authorities from the time period and saw no evidence that a “contract of employment” strictly meant that an employer-employee relationship was formed.
SCOTUS’s decision to hold that “contracts of employment” in Section 1 of the FAA include independent contractor agreements, transportation employers will now find that the arbitration agreements and class action waivers they signed with their independent contractors are mostly likely to be considered invalid. Further, some state courts applying state law have refused to uphold certain arbitration provisions, such as class action waivers, on unconscionability grounds. This means that a wave of class and collective actions can threatening to overwhelm transportation entities engaged in interstate commerce.
Arbitration is a means to permit disputes to be resolved with less litigation expense. SCOTUS’s ruling will likely raise legal and operational costs for transportation companies. These companies may be forced to pass on the higher costs to consumers who depend on interstate trucking/transportation for the delivery of commercial goods. This decision is a victory for transportation workers’, but if the costs of the goods being transported are increased due to the increased costs of litigation, it will be the public that pays the ultimate costs.