The US Supreme Court recently ruled that independent contractors engaged in interstate commerce fall under the Federal Arbitration Act’s transportation worker exemption, and thus the FAA cannot be used to enforce mandatory arbitration agreements with such individuals. Companies entering into independent contractor agreements with arbitration provisions should assess whether the independent contractors are interstate “transportation workers”; if so, the agreement to arbitrate may not be enforceable under the FAA, but could still be enforceable under state law.
The Federal Arbitration Act (FAA) establishes a procedural framework for courts to compel arbitration and creates a national policy favoring arbitration of disputes. Subject to certain exceptions, the FAA requires courts to treat arbitration agreements as “valid, irrevocable, and enforceable.” 9 USC § 2. While the FAA applies broadly to arbitration agreements, Section 1 of the FAA renders the FAA’s requirements inapplicable to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce”—the so-called “transportation worker exemption.”
In New Prime Inc. v. Oliveira, the US Supreme Court ruled 8–0 that the transportation worker exemption applies not just to employees, but also to independent contractors. This ruling appears to overturn decades of understanding that independent contractors did not fall within the contours of the transportation worker exemption and, therefore, agreements to arbitrate claims with them were enforceable under the FAA.
As a result, companies that enter into independent contractor agreements containing arbitration provisions should assess whether the independent contractors with whom they are contracting are (1) “transportation workers” who (2) are engaged in interstate commerce. If so, New Prime teaches that such agreements to arbitrate may not be enforceable under the FAA. They may, however, still be enforceable under state law, forcing businesses with arbitration agreements with independent contractors to navigate a patchwork of 50 state laws.
A Court (Not an Arbitrator) Should Determine Whether Section 1 Applies
The first question answered in New Prime was whether it is the court or the arbitrator that should determine if Section 1 applies to an agreement to arbitrate. The Court held that “a court should decide for itself whether [Section] 1’s ‘contracts of employment’ exclusion applies before ordering arbitration.” The Court so held even though the parties’ contract contained a “delegation clause” in which the parties agreed that the arbitrator would have authority to decide threshold questions of arbitrability. The Court explained that Section 1 is an “antecedent statutory provision” that “limit[s] the scope of the court’s powers under the [FAA’s other provisions],” and not even the delegation clause can be enforced through the FAA if it appears in a “contract of employment” that is exempted from the FAA’s coverage under Section 1.
The Transportation Exemption Applies to Independent Contractor Agreements with Transportation Workers Engaged in Interstate Commerce
The Court next turned to whether the agreement between New Prime and Oliveira falls within the transportation worker exemption. The parties agreed that Oliveira, a truck driver, was a “worker engaged in . . . interstate commerce” and, for purposes of the appeal, assumed that he was an independent contractor. Thus, the exemption’s applicability turned solely on whether the term “contracts of employment” encompasses contracts involving independent contractors (rather than just employees). The Court held that it does.
To determine the meaning of “contracts of employment,” the Court examined the term’s ordinary meaning in 1925, when Congress enacted the FAA. The Court concluded that at the time of the FAA’s adoption, “a ‘contract of employment’ usually meant nothing more than an agreement to perform work,” and “most people then would have understood [Section] 1 to exclude not only agreements between employers and employees but also agreements that require independent contractors to perform work.” The Court therefore held that independent contractor agreements with “transportation workers” such as Oliveira fall within Section 1’s exception to the FAA’s enforcement regime. As a result, a business seeking to enforce an arbitration agreement with an interstate transportation worker likely cannot rely on the FAA to require enforcement even if the transportation worker is an independent contractor.
New Prime is of significant importance to companies in the interstate transportation industry and companies that contract with interstate “transportation workers.” But it does not ultimately resolve whether an arbitration agreement will be enforced.
While a court cannot invoke the FAA as the statutory vehicle through which to compel arbitration of claims of a transportation worker who is engaged in interstate commerce, that does not mean that the court necessarily will be precluded from compelling arbitration using a state arbitration act or state contract law. An interesting question that may present itself is whether a state law that was enacted after the FAA and that excludes from coverage a “contract of employment” (or similar language) will be interpreted to follow the FAA under New Prime, or whether the more modern (post-1925) meaning of the word “employment” (i.e., an employer-employee relationship) will control.
Another significant open question arises in the “gig economy,” where companies often contract with drivers to transport persons and parcels locally but not across state lines. In such cases, there will be litigation over whether a local driver who does not cross state lines (or does not often do so) is engaged in interstate commerce within the meaning of Section 1 simply because the transported person or parcel crosses state lines. While a number of cases have already held that drivers—not just their cargo—must actually cross state lines to be deemed to be “engaged in interstate commerce” under Section 1, that issue will continue to be hotly litigated.
In the meantime, businesses with arbitration agreements with transportation workers should review those agreements. In many instances, the agreements will expressly state that they are governed by the FAA. Businesses may want to revise their agreements to provide for alternative enforcement pursuant to state law in the event that it were determined the FAA does not apply.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
John S. Battenfeld
Anne Marie Estevez
Barbara J. Miller
Molly Moriarty Lane