Supreme Court Ruling May Stop Enforcement of Some Contractors’ Arbitration Agreements

New Prime v Olivieri double decker bus

The year 1925 was a banner year for transportation. Walter Percy Chrysler founded the Chrysler Corporation, London introduced its first double decker bus, and Malcolm Campbell became the first person to exceed 150 mph in an aero-engined car, accomplishing the feat at Pendine Sands in Wales. (Thanks, Wikipedia!)

Meanwhile, back in the States, American courts had developed a habit of not enforcing arbitration agreements, and Congress was determined to change that. In 1925, Congress enacted the Federal Arbitration Act (FAA), which is the law that allows parties to agree to arbitrate disputes and which tells courts to respect those agreements, subject to a few limited exceptions.

Those exceptions were at issue in the Supreme Court case of New Prime v. Olivieri, decided last week in an 8-0 decision. 

The Court ruled that:

(1) If there is a question about whether the FAA applies to an arbitration agreement, a court — not an arbitrator — decides whether the FAA protects the arbitration agreement. 

(2) The FAA’s exception — which says the FAA does not cover workers in the transportation industry — applies not just to employees in the transportation industry but also independent contractors. In other words, the FAA does not protect arbitration agreements entered into by independent contractors in the transportation industry.  

For business owners who wish to use arbitration agreements with their workers, what does this ruling mean?

I.  Who decides who decides?

Sometimes an arbitrator decides whether a dispute is subject to arbitration, and sometimes a court decides. Last month in the Henry Schein case, the Supreme Court held that an arbitrator can decide, in most instances, whether a dispute is covered under an arbitration agreement.

But last week’s New Prime case draws a distinction about who decides if the issue is whether the FAA applies to the dispute.

So, to simplify: On the issue of who decides whether a dispute is subject to an arbitration agreement, what’s the rule now? 

1. If the issue is whether the FAA protects the arbitration agreement, a court decides whether the FAA applies or not. (That’s the New Prime decision.)

2. If the FAA does apply and the issue is whether a particular dispute is subject to the agreement to arbitrate, then the arbitrator decides whether a dispute is subject to the agreement to arbitrate — assuming that the arbitration agreement has delegated to the arbitrator the ability to decide. (That’s the Henry Schein decision.)

The last sentence in Point 2 is the reason companies should consider adding a clause to their arbitration agreements saying that the arbitrator decides questions of arbitrability.

II.  How does the New Prime ruling apply to arbitration agreements with independent contractors? 

For independent contractors not in the transportation industry, this ruling does not apply. Arbitration agreements with independent contractors are generally enforceable and are protected by the FAA.

But how do we know the FAA doesn’t apply to all independent contractors in interstate commerce?

To answer that question, we need to head back to the Year 2001, a year after the electronic calendar shifted away from 19xx and technically-inclined doomsday prophets foretold of planes falling out of the sky. Shortly after mankind endured this potential calendar-caused calamity, the Supreme Court issued its decision in Circuit City Stores v. Adams.

The issue in Circuit City was whether the FAA applies to arbitration agreements between employers and employees. There is a carve out provision in the FAA, saying that the law favoring arbitration does not apply to “to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

The issue in Circuit City was whether the carve out for “contracts of employment” of “workers engaged in foreign or interstate commerce” was intended to be broad and apply to all employees in interstate commerce or just those in the transportation industry. What was the intended meaning of “workers engaged in … interstate commerce”?

In Circuit City, the Court ruled that:

(1) the FAA generally does apply to arbitration agreements between employers and employees, but

(2) the FAA does not apply to workers in the transportation industry.

The Court decided that the phrase “workers engaged in … interstate commerce” was intended to refer only to workers in the transportation industry, not all workers. Arbitration agreements with employees in industries other than transportation would be enforceable under the FAA.

But that decision left open an important issue: What about independent contractors in the transportation industry? Do they have “contracts of employment”? Does the FAA apply to their arbitration agreements or not?

Fast forward to last week’s New Prime case.

The Supreme Court ruled that when the FAA was written in 1925, the phrase “contracts of employment” was understood to mean all work engagements, not just employer-employee relationships. Our understanding of the word “employment” has changed over time and, if that phrase were used in a statute today, it would likely refer only to true employer-employee relationships. But in 1925, it meant all work.

The Court therefore ruled that the FAA’s carve out applies to all workers in the transportation industry, regardless of whether such workers are employees or independent contractors. This means that arbitration agreements signed by employees or independent contractors in the transportation industry are not covered by the FAA, and therefore their agreements to arbitrate disputes are not protected by the FAA. Those disputes might have to go to court.

So what happens now?

First, the ruling is narrower than it may seem. The Court ruled only that the FAA did not apply to independent contractors’ arbitration agreements in the transportation industry.  It did not rule that these arbitration agreements were automatically void.

Many states have their own statutes that protect arbitration as a means for resolving disputes. Companies with workers in the transportation industry should check whether there is a state law that can be applied to protect these arbitration agreements.  If it would be reasonable to apply that state’s law, then companies should consider choosing that state’s law in the arbitration agreement’s Choice of Law provision. The right state’s law might still be able to save the arbitration agreement. We can expect further litigation on this subject, but here’s a tip for now. Try to pick a state with a favorable arbitration statute if your workers are in the transportation industry.

Second, we can expect the next battle to be over the meaning of the phrase, “transportation industry.” Does the “transportation industry” include only workers who transport goods across state lines? Or does the “transportation industry” include independent contractor drivers who transport passengers across town (such as ride share) or who deliver your pizza?

In Circuit City, the Supreme Court looked favorably on other court decisions that had defined the “transportation industry” to mean those workers “actually engaged in the movement of goods in interstate commerce.” If that holds true, then local drivers of passengers and late-night food cravings should be considered not part of the “transportation industry.” The FAA, therefore, would still apply to those workers.

But we can expect the plaintiffs’ bar to argue for a broad interpretation of the “transportation industry.” We can now expect to see arguments that rideshare drivers and local delivery drivers are in the “transportation industry” and that their arbitration agreements are not protected by the FAA. I think that argument is incorrect, but I do expect to see it.

I would expect Courts of Appeal (and perhaps eventually the Supreme Court) to adopt a narrow view of the “transportation industry,” meaning that the FAA still applies to independent contractors who transport people or make local deliveries. I expect the courts to rule that the carve out from the FAA exempts only those workers (employees and contractors) who routinely transport goods across state lines.

For now, here’s what you need to know:

  • Arbitration agreements with independent contractors in the “transportation industry” are not protected by the FAA. It may be more difficult to enforce those arbitration agreements unless they are governed by the law of a state with its own arbitration statute.
  • Arbitration agreements with independent contractors outside of the transportation industry should remain enforceable under the FAA.

And the bottom line for me is that maybe it’s time for self-driving cars.

For more information on joint employment, gig economy issues, and other labor and employment developments to watch in 2019, join me in Orlando on Jan. 24, Philadelphia on Feb. 26, or Chicago on Mar. 21 for the 2019 BakerHostetler Master Class on Labor Relations and Employment Law: Meeting Today’s Challenges. Advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com. If you list my name in your RSVP, I will have your registration fee waived.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Arbitrator or Court: Who Decides Who Decides?

New prime v olioviera - who decides who decides

Who decides who decides? That’s as fun to write as it is to think about.

On TV, sometimes the parties agree that Judge Judy can decide. (Here’s how that works.) But sometimes, the parties disagree over who decides. What happens then? Who decides who decides?

That’s an issue the Supreme Court is going to consider, as it relates to arbitration agreements for independent contractors in the transportation industry.

The dispute stems from an arbitration agreement between Dominic Oliviera, an independent contractor (although he’s not so sure of that), and New Prime, Inc., a trucking company. Their arbitration agreement says that all disputes go to arbitration, including those about the scope of what gets arbitrated. In other words, the arbitrator gets to decide whether something is subject to arbitration. (That’s not an unusual clause, by the way.)

Our protagonist Mr. O tried to bring a lawsuit, claiming wage and hour violations by New Prime. In response, New Prime pointed to the contract and said the issue had to be arbitrated. Not to be outwitted, however, Mr. O then pointed to an exception in the Federal Arbitration Act (FAA). The FAA is the federal law favoring arbitration of disputes, but the FAA contains an exception. The FAA doesn’t apply to employees in the transportation industry.

I hope I haven’t bored you because here’s where it gets interesting.

If the FAA exception applies, Mr. O doesn’t have to arbitrate and he can go to court with his wage and hour claims instead.

But the exception only applies (it seems) if he is an employee. If he’s an independent contractor, the FAA should still apply, which means that New Prime can still force him into arbitration.

Now here’s where it gets really weird.

The agreement says that the arbitrator gets to decide whether the matter is subject to arbitration. But Mr. O says he’s an employee and therefore he’s not bound by the arbitration agreement. If he’s not bound by the arbitration agreement, then New Prime can’t force him to go to the arbitrator to decide whether the dispute is subject to arbitration. So, who decides who decides?

Still with me? Here’s the bottom line. There are two important questions that the Supreme Court has agreed to consider in this case:

(1) Whether a dispute over applicability of the Federal Arbitration Act’s Section 1 exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and
(2) whether the FAA’s Section 1 exemption, which applies on its face only to “contracts of employment,” is inapplicable to independent contractor agreements.

For businesses using mandatory arbitration agreements, these are important issues.

Last week, in this post, we addressed Issue #2. But Issue #1 is also pretty important for businesses with arbitration agreements in the transportation industry. If the validity of those agreements is contested, who decides whether they are valid?

If the arbitrator gets to decide what is subject to arbitration, the realist deep inside you (he’s roommates with the pessimist) expects that the arbitrator will keep the case. In other words, the most likely ruling by the arbitrator — who is paid by the parties by the hour to conduct the arbitration — is that the matter is going to be subject to arbitration. After all, that’s what the contract says, and if the contract didn’t apply, then the arbitrator never would have gotten involved in the first place.

This case won’t be decided until next year.

For more information on independent contractor issues and other labor and employment developments to watch in 2018, join me in Cincinnati on March 28 for the 2018 BakerHostetler Master Class on Labor Relations and Employment Law: A Time for Change. Attendance is complimentary, but advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com, and list my name in your RSVP so I can be sure to look for you.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Can You Require Independent Contractor Drivers to Sign Arbitration Agreements?

Arbitration agreementstranspiortation industry drivers new prime v oliviera coin tossHow do you want your disputes decided? State court? Federal court? Arbitrator? Coin toss?

Ok, probably not coin toss, but that method is still used to break ties in local elections. (Spoiler alert: It was heads.)

Lots of businesses using independent contractors rely on arbitration agreements (with class action waivers) as a way to protect against a claim of independent contractor misclassification. Arbitration agreements with class action waivers prevent large groups of contractors from joining together in court to file class action lawsuits.

Instead, they have to bring any claims on their own. That means much less money is at stake in any individual case, and much of the incentive for hungry plaintiffs’ lawyers to file these claims is gone. (So sad.)

When bound by an arbitration clause, some plaintiffs have pointed out that there is an exception under federal arbitration law that applies to transportation workers. The Federal Arbitration Act, which is the federal law favoring arbitration, doesn’t apply to employees in the transportation industry.

Most courts have said this exception applies only to employees, not to independent contractors. In other words, employees in the transportation industry might not have to arbitrate their claims, but independent contractors do.

A recent court of appeals decision, though, may have changed that. The First Circuit Court of Appeals decided that the FAA transportation worker exception applies to employees and independent contractors. If true, the implications for the gig economy could be massive. Independent contractor drivers are all over the transportation industry. (Some might not be in interstate commerce, but that’s a technical argument for court, not for a blog.) Uber, Lyft, FedEx. They have all switched to using mandatory arbitration agreement with their independent contractor drivers.

The Supreme Court has agreed to decide this important issue in a case called New Prime Inc. v. Oliviera.

The Court just accepted the case last week, so we won’t have a ruling until next spring or summer, but this is an important case to watch for any business using independent contractors in the transportation industry. Will your arbitration agreements survive?

The issue accepted by the Supreme Court for review is:Whether the FAA’s Section 1 exemption, which applies on its face only to ‘contracts of employment,’ is inapplicable to independent contractor agreements.”

Note for Supreme Court Watchers: This is a separate issue from the Epic Systems case already heard by the Supreme Court, which should be decided by this June. In Epic Systems, the issue is whether the National Labor Relations Act prohibits businesses from requiring their employees to sign mandatory arbitration with class action waivers. The issues are somewhat related, but distinct. Epic Systems deals with employees’ arbitration agreements; New Prime deals with independent contractors and is limited to the transportation industry.

For more information on independent contractor issues and other labor and employment developments to watch in 2018, join me in Cincinnati on March 28 for the 2018 BakerHostetler Master Class on Labor Relations and Employment Law: A Time for Change. Attendance is complimentary, but advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com, and list my name in your RSVP so I can be sure to look for you.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.