In 1925, Congress enacted the Federal Arbitration Act (“FAA”) which stated that arbitration agreements are enforceable by courts with certain exceptions. One of these exceptions in §1 precludes the enforceability of arbitration agreements when the agreement concerns a “contract of employment” with “workers” engaged in interstate commerce. There were two main issues presented in New Prime: (1) “When a contract delegates questions of arbitrability to an arbitrator, must a court leave disputes over the application of §1’s exception for the arbitrator to resolve?” and (2) “…does the term ‘contracts of employment’ refer only to contracts between employers and employees, or does it also reach contracts with independent contractors?”
In New Prime, Oliveira filed a class action lawsuit alleging New Prime denied its drivers the statutorily due minimum wage. New Prime and its drivers entered into independent contractor agreements that provided for disputes arising out of the agreement were to be arbitrated. The arbitration clause even defined the scope of arbitration and provided that an arbitrator was to decide issues of arbitrability (whether the dispute was subject to the arbitration agreement). Over time, Courts had inconsistently decided which issues an arbitrator could decide and which decisions should be left to the courts.
The Supreme Court held that Courts should decide whether §1’s “contracts of employment” exclusion applies before ordering arbitration. New Prime attempted to advance a nuanced argument that a “delegation clause” in the contract provided an arbitrator authority to decide the arbitrability issue. The principle of severability within the FAA allows this to occur as the arbitration clause in the contract may be enforceable despite a challenge to the contract’s validity or enforceability. However, the Court noted this argument overlooks the antecedent statutory provisions in §§1 and 2. Justice Gorsuch explained a court cannot exercise its statutory power to stay a case and compel arbitration without first knowing whether the contract falls within or beyond the boundaries of §§1 and 2 regardless of what the contract says.
The second question addressed by the Court concerned whether a court could order an independent contractor to submit to arbitration. Oliveira argued that he qualified under the FAA’s §1 exception..” New Prime believed Congress understood the distinction between independent contractors and employees in 1925 when the FAA was enacted and therefore purposefully left independent contractors out of the exception.
On January 15, 2019, The Supreme Court ruled that an independent contractor of a trucking company qualified under the FAA’s §1 exception for disputes surrounding “contracts of employment” involving “workers” engaged in interstate commerce. Therefore, the Court held that the FAA does not allow courts to order an independent contractor involved in interstate commerce into an arbitration agreement when the dispute concerns a “contract of employment.”
In the opinion authored by Justice Gorsuch, the Court held that the term “contracts of employment” possibly embraced agreements by independent contractors to perform work in 1925 when the FAA was enacted. The Court also believed the broad term “workers” included independent contractors at the time of the FAA’s enactment.
The Court disagreed with New Prime’s argument that arbitration should be ordered to abide by Congress’ effort to counteract judicial hostility towards arbitration and in favor of arbitration agreements. In so doing, the Court stated “[c]ourts…are not free to pave over bumpy statutory texts in the name of more expeditiously advancing a policy goal.”
Impact on the Transportation Industry
Mandatory arbitration agreements utilized by transportation companies with owner-operators are now essentially unenforceable when used to resolve disputes surrounding “contracts of employment” as courts cannot compel the independent contractor into arbitration, despite the presence of a contractually valid arbitration agreement. The New Prime decision makes it clear that only Congress can change the result of this case by amending the FAA. Such a change is unlikely, given the current state of Congress. This means that a dispute, such as a Federal Wage & Hour class action by owner-operators against a trucking company, will be litigated in court unless the parties mutually agree to submit to binding arbitration.
For more information concerning the impact of the Supreme Court’s recent decision or to consult with a Segal McCambridge Singer & Mahoney attorney about a similar legal issue, please contact shareholders David Yates, Eric Conn, Peter Strelitz or associate, Thomas Lurie.