1.31.19

In January 2019, the United States Supreme Court’s long track record broadly upholding arbitration agreements hit a major speed bump for transportation companies. In New Prime, Inc. v. Dominic Oliveira, the Court held that workers involved in interstate commerce, including both employees and independent contractors, are not covered by the Federal Arbitration Act (FAA). The contract between Mr. Oliveira, a truck driver, and New Prime identified him as an independent contractor and also mandated that any disputes between them be resolved in arbitration, including disagreements “over the scope of the arbitrator’s authority.” When Mr. Oliveira brought a federal class-action lawsuit alleging that New Prime had not properly paid him and other similarly-situated individuals under the Fair Labor Standards Act (FLSA), the company pointed to their agreement and requested that the trial court exercise its authority under Section 4 of the FAA, which allows courts to enforce private agreements to arbitrate disputes and compel the parties to arbitration. Mr. Oliveira countered that Section 1 of the FAA, which excludes from the Act’s coverage disputes related to transportation workers’ “contracts of employment,” prohibited the court from ordering the parties to go to arbitration. Both the District Court and Appellate Court agreed with Mr. Oliveira and did not compel the parties to arbitrate, and New Prime appealed the case to the Supreme Court.

Justice Brett Kavanaugh took no part in the unanimous 8-0 decision, which was argued prior to him taking the oath of office. Justice Neil Gorsuch, writing for the Court, examined Section 1 of the FAA, which excludes “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” from the Act’s coverage. In doing so, the Court analyzed two issues stemming from that qualification in the FAA. First, the justices considered whether a court could allow an arbitrator to decide if Section 1 applies when the agreement “delegates questions of arbitrability to an arbitrator.” Second, they evaluated whether the term “contracts of employment” includes agreements with independent contractors in addition to traditional employer-employee relationships.

With respect to the first issue, Justice Gorsuch focused on the FAA’s terms and sequencing in deciding that it is the responsibility of the courts to determine whether Section 1’s exclusion applies to the agreement and thus, whether it is appropriate to order the parties to arbitration. The Court explained that Section 1 aids in defining the terms of Section 2, specifically the word “commerce,” and whether the contract is covered by the FAA. In turn, those sections inform the applicability of Sections 3 and 4, which allow a court to “stay litigation and compel arbitration according to a contract’s terms.” More particularly, Section 2 defines arbitration agreements as written provisions in maritime contracts or contracts evidencing a transaction involving commerce, and Section 1 makes clear work done by “seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” are not considered “commerce” by the FAA. The justices were further persuaded to come to this conclusion as at the time of the FAA’s enactment, “Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers” before adopting the FAA and did not want to disturb those arrangements. As a result, the Court concluded that the FAA does not apply to agreements between companies and such workers.

Informed by this determination, Justice Gorsuch reasoned that the order of Sections 1, 2, 3, and 4 indicates that “a court must first know whether the contract itself falls within or beyond the boundaries of” Sections 1 and 2 before deciding “to invoke its statutory powers under” Sections 3 and 4. By way of this holding, the Court made clear that courts’ power to compel arbitration is not unconditional, even if parties to a private contract are unequivocal in expressing their preference to arbitrate disputes.

In upholding the Appellate Court’s decision in favor of Mr. Oliveira on the second issue, the Supreme Court focused on the meaning of the phrase “contracts of employment.” Relying on Supreme Court precedent that words in statutes should be interpreting in accordance with their ordinary meanings at the time Congress enacted the laws, the Court looked to the phrase’s meaning in 1925 when the FAA was passed. The Court explained that at that time, the word “employment” was synonymous with “work,” and thus the term “contract of employment” was understood as an agreement to perform work. Given this, the phrase was not limited to formal relationships between employers and employees, but also included agreements between independent contractors and companies. This interpretation was bolstered by early twentieth-century Supreme Court cases, decisions from state courts, and federal and state statutes, which also reflected this understanding that the phrase “contract of employment” did not only signal a formal employer-employee or master-servant relationship. In addition, Justice Gorsuch highlighted that the use of the word “workers” in the neighboring phrase “any class of workers engaged in foreign or interstate commerce” signaled an intention that “contract of employment” was meant to broadly encompass “any contract for the performance of work by workers.” As a result, the Supreme Court held that Section 1 serves to exclude from the FAA’s coverage disputes between independent contractors and the companies for which they perform work in interstate commerce, in addition to disputes between employees and their transportation company employers.

For businesses who employ or contract with interstate transportation workers, New Prime, Inc. v. Oliveira serves as a wake-up call that their arbitration agreements, as construed under the FAA, will not keep suits brought by such individuals out of court. While this case definitely dealt a blow to management, not all hope is lost as companies can look to state contract laws and arbitration laws as a way to pursue dispute resolution outside of the courts. While Louisiana’s arbitration law has a similar exemption for transportation workers, it is the only state to have such an exception. Further, nearly every state has laws governing the enforcement of arbitration provisions. Although there is not uniformity in such laws, they may provide a means for companies to resolve disputes with workers in the private forum of arbitration.

By: Allison R. Wallrapp-McMullan

Allison R. Wallrapp-McMullan is an attorney in the Firm’s Labor and Employment Practice Group. If you have any questions or concerns about this issue or any other matter, please contact Allison directly at 813-223-1099.