Executive Summary: In New Prime Inc. v. Oliveira, the U.S. Supreme Court held today that the Federal Arbitration Act’s (FAA) exclusion of certain “contracts of employment” from the Act’s coverage applies to transportation worker independent contractors. In its holding, the Court did not define who constitutes a transportation worker under the FAA.
In a unanimous opinion (sans Justice Kavanaugh, as he had not taken the bench before oral argument on October 3) penned by Justice Gorsuch, the Court addressed two key issues that had divided the lower courts. The Court first held that a court and not an arbitrator should determine whether a Section 1 exclusion applies before ordering arbitration. Second, the Court held that the FAA’s term “contracts of employment” refers to any agreement to perform work, whether that work is performed by an independent contractor or an employee.
Dominic Oliveira, who worked as an independent contractor truck driver for New Prime, filed a class action in federal district court claiming he was misclassified as an independent contractor. New Prime invoked the arbitration clause of the parties’ contract to move the case to arbitration. Oliveira countered that, per Section 1 of the FAA, “nothing” in the Act “shall apply” to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” and thus, as a truck driver he was in a class of workers exempted from the FAA’s reach. New Prime rejoined that the contract had a delegation clause, meaning an arbitrator should interpret whether the parties’ disputes were covered by the FAA.
The district court agreed with Oliveira, holding that courts should interpret the exceptions in Section 1 of the FAA, and that Section 1 exempted transportation workers from arbitration. The First Circuit affirmed. The Supreme Court granted New Prime’s petition for certiorari, and the case was one of the first argued in the 2018 Term.
The Supreme Court affirmed. The Court agreed with the First Circuit that a court should decide for itself whether Section 1’s “contracts of employment” exception applies before ordering arbitration. It reasoned that courts should determine whether the contract is within the coverage of the FAA before invoking the so-called “severability principle” (where courts treat a challenge to the validity of an arbitration agreement or delegation clause separately from a challenge to the validity of the entire contract in which it is contained) because interpreting the Section 1 “contracts of employment” exception was the antecedent statutory inquiry. And because that question is whether the contract triggers the FAA’s coverage, the Court held that the question was non-delegable.
Turning to the second issue, i.e., whether Section 1 covered Oliveira even though he was classified as an independent contractor, the Court focused on 1925, the year in which Congress enacted the FAA. According to the Court, a “contract of employment” in 1925 did not necessarily imply the existence of an employer-employee or master-servant relationship. Relying on dictionaries of the era, the Court noted that they treated employment as a synonym for “work.” As the Court neatly put it, “[a]ll work was treated as employment, whether or not the common law criteria for a master servant happened to be satisfied.” Moreover, the Court found more confirmation in its holding in a neighboring term in the FAA. Congress employed the term “workers” in the transportation exemption, “a term,” the Court wrote, “that everyone agrees easily embraces independent contractors.”
Employers’ Bottom Line: The Court clarified that the transportation workers exception to the FAA applies equally to independent contractors and company employees. The Court also clarified that the FAA’s qualifications section exempting certain workers from the FAA’s coverage is a question for the courts to decide, not arbitrators, even when there is a valid delegation clause in an arbitration agreement. Critically, the Court did not opine on the question of who constitutes a transportation worker within the meaning of the FAA, a question which is both industry and fact intensive under the statute.
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