Supreme Court Sides with Truck Driver in Arbitration Dispute

Federal exception for interstate commerce applies to independent contractors

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​The U.S. Supreme Court ruled Jan. 15 that a trucking company can't compel arbitration in a wage and hour case brought by a truck driver who was classified as an independent contractor.

In an arbitration agreement, employers and workers can agree in advance to have a neutral third party (an arbitrator) decide legal claims rather than suing in court. Arbitration is sometimes viewed as faster and more cost effective than litigation.

Under the Federal Arbitration Act (FAA), businesses can generally enforce reasonably drafted agreements to arbitrate work-related claims. However, Section 1 of the FAA has an exception for "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." So transportation employees involved in interstate commerce, such as long-haul truck drivers, can't be forced to arbitrate employment claims.

The question in New Prime Inc. v. Oliveira, was whether the exception applies only to employees or also to independent contractors.

The high court affirmed that the exception applies to contractors. "We see here no evidence that a 'contract of employment' necessarily signaled a formal employer-employee or master-servant relationship," Justice Neil Gorsuch wrote for the court.

While the decision is of great importance to the transportation industry, it is limited to that industry, explained Richard Rosenblatt, an attorney with Morgan Lewis in Princeton, N.J. and Philadelphia.

"That said, it does not ultimately resolve whether an arbitration agreement will be enforced," he said.

There could be a situation where a driver's agreement falls under an FAA exception but is still enforceable under state arbitration laws, noted Robert Roginson, an attorney with Ogletree Deakins in Los Angeles.

Background

In this case, the driver brought a class-action complaint in court against an interstate trucking company, asserting that he and other independent contractors were misclassified and due certain employment benefits, such as minimum wage payments. 

Although the driver had signed an arbitration agreement with the trucking company, he claimed that the FAA's exception for certain transportation employees applied to employees and independent contractors alike. The trucking company argued that the exception applied only to employees and that arbitration agreements can be enforced against independent contractors.

The 1st U.S. Circuit Court of Appeals sided with the driver and held that the independent contractor agreement was a contract of employment and was exempt from the FAA. The Supreme Court upheld the 1st Circuit's ruling in an 8-0 decision (Justice Brett Kavanaugh did not participate).

Historic Review  

The FAA was enacted in 1925 to give validity to arbitration as an enforceable alternative to litigation. Whether the mandatory arbitration agreement in this case was a "contract of employment" was viewed in the context of the time the FAA was enacted, said Michael Droke, an attorney with Dorsey & Whitney in Palo Alto, Calif.

The court held that "contracts for employment" included all agreements to perform work, regardless of any 2019 definitions of employment or independent contractor status. In so doing, the court emphasized the importance of original statutory intent in interpreting this phrase, Droke said. 

The decision will not impact companies that hire drivers solely to work in one state, Roginson said. For the FAA exclusion to apply, the worker must be engaged in interstate commerce.

The justices didn't need to address the meaning of interstate commerce in New Prime. "Happily, everyone before us agrees" that the plaintiff qualified as a worker engaged in interstate commerce, Gorsuch wrote.

Who Decides?

Some arbitration agreements include a clause stating that an arbitrator must decide the threshold question of whether an issue should be heard by an arbitrator or a court. But in New Prime, the justices said it is up to a court to decide whether an exclusion under Section 1 of the FAA applies.

In another case that was decided last week, the high court found that an arbitrator should decide the threshold question of whether an issue is arbitrable, even when the language of the agreements suggests that there should be no arbitration.

Both decisions are consistent with the FAA's language, Roginson said. No FAA exclusion applied in the other case, and the agreement designated the threshold question to an arbitrator.

[SHRM members-only online discussion platform: SHRM Connect]

Another arbitration case is pending before the court, in which the court was asked to decide whether an arbitration agreement with general language stating that "arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings" waived an employee's right to bring a class-action claim.

The Supreme Court has generally ruled in favor of arbitration. Last year, for instance, the justices found that class-action waivers in arbitration agreements don't run afoul of federal labor law.

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