U.S. Supreme Court Rules in Favor of Independent Contractors/Owner Operators
On January 15, 2019, the United States Supreme Court issued a blockbuster holding, ruling in favor of independent contractors who work in transportation.
In New Prime Inc. v. Oliveira, the Court was faced with an issue involving a dispute between the trucking company New Prime Inc. and one of its drivers, Dominic Oliveira. The parties’ contract labeled Oliveira as an independent contractor rather than an employee, and it instructed that any dispute arising out of the parties’ relationship should be resolved by an arbitrator − even disputes over the scope of the arbitrator’s authority.
Oliveira filed a class action lawsuit on behalf of himself and thousands of other contractors. He alleged that New Prime misclassified him as a contractor to underpay him in violation of a federal labor law. In response to Oliveira’s complaint, New Prime asserted that under the Federal Arbitration Act (FAA) the court must compel arbitration according to the terms found in the parties’ agreements. The District Court for the District of Massachusetts and Court of Appeals for the First Circuit agreed with Mr. Oliveira.
SUPREME COURT DECISION
On appeal, the U.S. Supreme Court examined two issues:
Whether the application of the exemption in § 1 of the FAA is an issue for courts or an arbitrator to decide, even if parties have agreed that issues of “arbitrability” are to be decided by an arbitrator
Whether the “contracts of employment” language in § 1 of the FAA applies only to agreements involving employees or extends to transportation workers classified as independent contractors.
On the first issue, the Court affirmed the First Circuit’s ruling, reasoning that, “while a court’s authority under the [FAA] to compel arbitration may be considerable … it is not unconditional.” One condition is established in § 1, which provides 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.” It held that a court should decide for itself whether § 1’s “contract of employment” exclusion applies before ordering arbitration. The Court reasoned this is the procedure even when parties’ agreement delegates to an arbitrator to decide whether the parties’ dispute is subject to arbitration because a “delegation clause” is “merely a specialized type of arbitration agreement” and can be enforced “only if the contract in which the clause appears does not trigger § 1’s ‘contract of employment’ exception.”
On the second issue, the Court interpreted the “contracts of employment” to refer broadly to any agreement to perform work and is not limited to employee-employer relationships. The Court relied on the ordinary meaning of “contract of employment” understood when Congress enacted the FAA in 1925. At the time of enactment of the statute, “employment” was more or less a synonym for “work,” and as a result, “most people then would have understood § 1 to exclude not only agreements between employers and employees but also agreements that require independent contractors to perform work.” There was no dispute that Oliveira, as an owner-operator for New Prime, qualified as a “worker engaged in … interstate commerce.” Therefore, the Court rejected New Prime’s claim for arbitration and held that “contracts of employment” cover even independent contractors.
The Court’s decision has broad implications for an industry that relies on the independent contractor/ owner operator model. While this ruling is limited to § 1 of the FAA, it serves as a reminder that arbitration agreements must be prepared thoroughly and thoughtfully in order to be used effectively. Further, this holding comes after past decisions in which a divided U.S. Supreme Court has compelled employees to arbitrate claims rather than litigate them. It seems likely that the Court will hear more cases challenging agreements to arbitrate within the transportation industry.
Although this decision delivered a victory to litigants who prefer to have a day in court, it does not completely rule out arbitration as a method of alternative dispute resolution. Since the Court’s decision resolved only questions of federal law, state arbitration statutes provide an alternative avenue for implementing an enforceable arbitration program. Additionally, forum selection and class waivers can be added into contractor agreements to minimize the potential of class action suits. Until courts determine the enforceability of these agreements under state law, it seems probable that jurisdictions will vary significantly.