SCOTUS Rules Federal Arbitration Act Not Applicable to Transportation Independent Contractor Agreements

On Jan. 15, 2019, the U.S. Supreme Court issued its opinion in New Prime Inc. v. Oliveira, No. 17-340, holding (1) that a court (rather than an arbitrator) should resolve a dispute over the applicability of the Federal Arbitration Act (FAA)'s § 1 exemption for "contracts of employment" of transportation workers, and (2) Mr. Oliveira's independent contractor agreement with New Prime falls within the § 1 exemption.

As we noted in prior blog posts, this case has substantial impact on the arbitrability of independent contractor misclassification cases. (See "Supreme Court to Clarify Applicability of Arbitration Act to Transportation Contracts," Mar. 1, 2018; "Supreme Court Hears Argument on Applicability of Federal Arbitration Act to Transportation Independent Contractor Agreements," Oct. 4, 2018).

Looking at the sequencing of the relevant sections of the FAA, the Court determined that to invoke the statutory powers of §§ 3 and 4 to stay litigation and compel arbitration, a court must first determine whether the contract falls within §§ 1 and 2, exempting contracts of employment of certain transportation workers engaged in interstate commerce. Only then can the court proceed to the merits of whether the § 1 exemption applies to a particular contract.

The parties agreed that Oliveira was a "worker engaged in interstate commerce." And Oliveira assumed for purposes of the appeal that his contract with New Prime established only an independent contractor relationship. Thus, the Court keyed in on what the term "contract of employment" meant at the time of the FAA's adoption in 1925. Siding with Oliveira, the Court concluded that the term usually meant nothing more than an agreement to perform work, which would include not only employer/employee agreements but also independent contractor agreements. Therefore, the First Circuit was correct in determining that it lacked authority under the FAA to order arbitration of Oliveira's claims.

It is also important to keep in mind what the Court did not determine in its opinion. First, the Court did not determine whether the § 1 exemption would apply to transportation workers who are not engaged in interstate commerce because the parties agreed that Oliveira was engaged in interstate commerce.

Second, the Court was able to keep a safe distance away from the ultimate issue of whether Oliveira was an "employee" for purposes of his minimum wage claims because Oliveira assumed for purposes of the appeal that an independent contractor relationship existed, and the key term under the FAA is "employment" not "employee."

Finally, the Court declined to look beyond the FAA at other potential avenues to compel arbitration in this case. Drivers' claims may still be subject to arbitration under state law, and, if so, the determination of whether a class action waiver in the arbitration agreement would be enforceable will likely be analyzed on a state-by-state basis.