Supreme Court Holds FAA Applicability Is Threshold Issue for Court; Independent Contractors Covered by FAA's Transportation Workers Exception | Practical Law

Supreme Court Holds FAA Applicability Is Threshold Issue for Court; Independent Contractors Covered by FAA's Transportation Workers Exception | Practical Law

In New Prime, Inc. v. Oliveira, the US Supreme Court held that a court must determine as a threshold issue whether the parties' arbitration agreement is covered by the Federal Arbitration Act (FAA) and that the FAA's transportation workers exception applies to independent contractors as well as traditional employees.

Supreme Court Holds FAA Applicability Is Threshold Issue for Court; Independent Contractors Covered by FAA's Transportation Workers Exception

by Practical Law Labor & Employment
Published on 15 Jan 2019 • USA (National/Federal)
In New Prime, Inc. v. Oliveira, the US Supreme Court held that a court must determine as a threshold issue whether the parties' arbitration agreement is covered by the Federal Arbitration Act (FAA) and that the FAA's transportation workers exception applies to independent contractors as well as traditional employees.
On January 15, 2019, in New Prime, Inc. v. Oliveira, the US Supreme Court held that a court must determine as a threshold issue whether an arbitration agreement is covered by the Federal Arbitration Act (FAA), even if the agreement delegates arbitrability issues to the arbitrator. The Court further held that independent contractors are covered by the transportation workers exception to the FAA. The Court affirmed the decision of the US Court of Appeals for the First Circuit. ( (U.S. Jan. 15, 2019).)

Background

Oliveira was a driver for New Prime Inc., an interstate trucking company. Oliveira worked under an operating agreement that classified him as an independent contractor and included a broad mandatory arbitration clause, which delegated the issue of arbitrability to the arbitrator. Oliveira filed a class action claiming he was misclassified as an independent contractor and was owed wages as an employee. New Prime sought to compel arbitration under the FAA.
Oliveira argued that the court lacked authority to compel arbitration of his claim because the FAA does not apply to "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce" (9 U.S.C. § 1) (Section 1). New Prime argued that this exception did not apply because Oliveira was an independent contractor and therefore was not party to a "contract of employment" under the FAA.
The US Court of Appeals for the First Circuit agreed with Oliveira. It held that the FAA's transportation workers exception applies to independent contractors and refused to compel arbitration in the matter. New Prime appealed to the Supreme Court to determine whether:
  • The court or the arbitrator decides whether a dispute falls within FAA authority or comes within the Section 1 transportation workers exception.
  • The term "contracts of employment" found in the FAA's Section 1 exception includes independent contractor relationships or only employer-employee relationships.

Outcome

The Supreme Court affirmed the decision of the First Circuit and held that independent contractors are covered by the transportation workers exception to the FAA.
The Court reasoned that:
  • Preference for arbitration is not unfettered. A court's authority to compel arbitration under the FAA does not extend to all private contracts, and is limited by:
    • Section 2, which provides that the FAA applies only when the parties' agreement is set forth as "a written provision in any maritime transaction or a contract evidencing a transaction involving commerce" (9 U.S.C. § 2); and
    • Section 1, which further defines the limits of Section 2, and states that "nothing" in the FAA "shall apply" to "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce" (9 U.S.C. § 1).
  • A court can only invoke its statutory authority in Sections 3 and 4 to stay litigation and compel arbitration if the parties' agreement is covered under the FAA. The court therefore must first decide whether the parties' agreement is excluded from FAA coverage under Section 1's "contracts of employment" of transportation workers exclusion applies before ordering arbitration, even if the contract contains a broad delegation of authority to the arbitrator regarding arbitrability.
  • The order of operations is important. New Prime noted that the contract contained a "delegation clause," giving the arbitrator authority to decide threshold questions of arbitrability; however, a delegation clause is itself just a type of arbitration agreement, and is enforceable under Sections 3 and 4 only if it appears in a contract consistent with Section 2 that does not trigger the Section 1 exception. (See Bernhardt v. Polygraphic Co. of Am., 350 U.S. 198, 201-02 (1956).)
  • The court is not free to make policy decisions in favor of the FAA's preference for arbitration when the FAA by its own terms does not apply.
  • The court previously stated that, "[I]t's a 'fundamental canon of statutory construction' that words generally should be 'interpreted as taking their ordinary ... meaning ... at the time Congress enacted the statute'" (Wisconsin Cent. Ltd. v. U.S., 138 S. Ct. 2067, 2074 (2018) (quoting Perrin v. U.S., 444 U.S. 37, 42 (1979))).
  • At the time of the FAA's adoption in 1925, a "contract of employment" did not have the modern specialized meaning that distinguishes employees from independent contractors and instead simply meant an agreement to perform work.
  • Based on the meaning of the statute at time it was enacted, the term "contracts of employment" in the FAA's Section 1 exception encompasses the independent contractor relationship as well as the employee-employer relationship (see Wisconsin Cent. Ltd., 138 S. Ct. at 2074; INS v. Chadha, 462 U.S. 919, 951 (1983)).
  • Because the FAA's term "contract of employment" refers to any agreement to perform work, including that of an independent contractor, Oliveira's work for New Prime:
    • was a contract of employment; and
    • fell within the statute's Section 1 exception, so it was not covered by the FAA and the parties' agreement was not entitled to the policy-driven presumption in favor of arbitration.
  • Given these findings, the Court had no authority to compel arbitration of Oliveira's claims.

Practical Implications

In Oliveira, the Supreme Court concluded that the court, not the arbitrator, decides whether a dispute is governed by the FAA or falls within the Section 1 transportation workers exception. In addition, the Court held that the phrase "contracts of employment" in the transportation workers exception covers not only employer-employee relationships, but also independent contractor relationships.
The Court's decision serves as a reminder that statutory terms should be interpreted by their ordinary meaning at the time of the statute's enactment and that courts do not have the power to rewrite a statute for policy reasons.
Oliveira resolves a circuit split about the scope of the FAA and clarifies that independent contractor misclassification disputes by interstate transportation workers are not covered by the FAA. This case will impact the arbitrability of other potential class or collective misclassification actions for workers in certain industries.