May 23, 2019 Articles

Supreme Court Resolves Circuit Split Regarding FAA’s Section 1 Exemption

A court must decide if an employment contract is subject to the exemption of transportation workers, and “independent contractors” fall within the scope of the exclusion.

By P. Jean Baker

Despite a delegation clause in the American Arbitration Association (AAA) rules, the Supreme Court held, in a unanimous decision, that a court must rule on whether a contract of employment is subject to the exclusion in section 1 of the Federal Arbitration Act (FAA). New Prime Inc. v. Oliveira, No. 17-340 (Jan. 15, 2019). Section 1 exempts transportation “workers” who engage in interstate commerce. In reaching its decision to not enforce the arbitration agreement, the Court found that independent contractors are “workers” and thus fall within the scope of the exclusion. 

Factual Background

In 2013, plaintiff Dominic Oliveira entered defendant New Prime’s on-the-job “Paid Apprenticeship” training program for new truck drivers. He was required to shadow experienced drivers for three to four weeks and drive 10,000 miles under supervision. He received an advance of $200 per week, to be subtracted from future earnings.

Following completion of the apprentice program, Oliveira worked as a company driver trainee. He was required to drive 30,000 miles and was paid 14 cents per mile driven. He was not compensated for additional time spent on the job. Following company deductions for the $200 weekly advance, Oliveira was paid about $4 per hour for driving 5,000 to 6,000 miles per week. At the completion of the training program, new drivers were offered a $100 bonus if they agreed to become an independent contractor instead of a company driver.

Having been told he would earn more as an independent contractor, he agreed and in May 2013 was sent to Abacus Accounting, a company located on the second floor of New Prime’s building. Abacus set up a limited liability company, Hallmark Trucking, on Oliveira’s behalf. Next he was sent to Success Leasing, a closely related corporation to New Prime, and presented with an “Independent Contractor Operating Agreement.” This agreement included an arbitration provision that incorporated by reference the AAA’s Commercial Arbitration Rules.

Oliveira was told he had to immediately sign the agreement because the company had a load waiting for him to transport. Following execution, he was sent to New Prime’s company store to purchase tools of the trade, fuel, and insurance. The purchases totaled about $5,000 and repayment was to be deducted from his paycheck at the rate of $75 per week. In addition, New Prime would also deduct lease payments on the truck, as well as payments for other tools New Prime ordered Oliveira to purchase. On several occasions, his weekly pay was negative after spending dozens of hours on the road.

In March 2014, Oliveira signed a second “Independent Contractor Operating Agreement” with an arbitration clause identical to the clause in the first agreement. During his time as an “independent contractor,” his role as a truck driver did not change from his time as an apprentice and trainee driver. New Prime continued to directly and indirectly control his scheduling, vacations, and time spent at home. Because of requirements and procedures mandated by New Prime, it was difficult, if not impossible, for Oliveira to work for other trucking or shipping companies.

In September 2014, Oliveira terminated his contract with New Prime. The next month New Prime agreed to hire him as a company driver on the condition New Prime could continue deducting money from his pay to repay the alleged debt to Success Leasing. The deductions resulted in Oliveira again receiving less than minimum wage.

Class Action Law Suit

In March 2015, Oliveira filed a class action law suit in federal court, alleging that New Prime violated the Fair Labor Standards Act and Missouri and Maine labor laws by failing to pay its truck drivers minimum wage. New Prime moved to compel arbitration, citing the arbitration clause in the two operating agreements. Oliveira sought to stay arbitration, arguing that the court must decide whether the operating agreements were exempt from arbitration under section 1 of the FAA. New Prime, citing the delegation clause in the AAA rules, argued that arbitrability was an issue to be decided by the arbitrator following appointment. The court disagreed and denied the motion to compel arbitration.

Basis of the Trial Court’s Decision

The court focused on the fact that Oliveira’s relationship with New Prime could be divided into three periods of time: the first when he was an apprentice and driver trainee, the second when he worked in accordance with the two operating agreements, and the third when he worked as a company driver. Application of the FAA’s exemption hinges on whether Oliveira had a contract of employment—rendering claims arising from that period exempt from arbitration—or an independent contractor relationship—rendering claims arising from that period subject to arbitration. The court concluded that Oliveira was clearly an employee during the first and third time periods. Thus, the only remaining issues were whether claims arising from the second period of time were exempted from arbitration and who made that decision—the court or an arbitrator?

Because neither the First Circuit nor the Supreme Court had answered the central question of whether parties can legally delegate to an arbitral forum the applicability of the section 1 transportation worker exemption, the trial court sought guidance from other circuits and discovered a split existed. Relying on the Supreme Court’s decision in Bernhardt v. Polygraphic Co. of America, 350 U.S. 198 (1956), the Ninth Circuit had held that a court must decide whether the section 1 exemption applies. In re Van Dusen, 654 F.3d 838 (9th Cir. 2011). Meanwhile, the Eighth Circuit, having focused its analysis on the delegation clause in the AAA rules, had adopted the opposite view, holding that parties can delegate this determination to an arbitrator. Green v. SuperShuttle Int’l, 653 F. 3d 766 (8th Cir. 2011).

Weighing the legal arguments, the trial court found the Ninth Circuit’s analysis more persuasive and held that a court must make an antecedent determination that a contract is arbitrable under section 1 of the FAA before a court can order arbitration pursuant to section 4. Given that private parties, through the insertion of a delegation clause, cannot confer authority on a district court that Congress chose to withhold, New Prime’s motion to compel arbitration was denied pending a decision by a court as to whether the exemption did or did not apply. New Prime appealed the decision.

The First Circuit Addresses Two Questions of
First Impression

Applicability of the FAA’s section 1 exclusion. The first question addressed by the court was who decides the applicability of the FAA’s section 1 exclusion. The court began by quickly concluding that the legal analysis conducted by the Eighth Circuit in the Green case was flawed. The question of the applicability of the section 1 exemption did not fall within the definition of “questions of arbitrability” that can be delegated to an arbitrator for determination. “Nothing in the AAA rules—including the power to determine the arbitrator’s jurisdiction—purports to allow the arbitrator to decide whether a federal district court has the authority to act under a federal statute.”

Statutory interpretation regarding independent contractor relationships. The second question addressed by the court was whether the section 1 exemption extended to transportation worker agreements that established or purported to establish independent contractor relationships. To reach its decision, the court had to review statutory interpretation de novo.

Acknowledging that the majority of district courts that had considered this issue had held the exemption did not extend to independent contractors, the First Circuit concluded there was a “fatal flaw” in the district court authority. Namely, the “judicial chorus” had failed to closely examine the statutory text. Such an examination would have revealed that at the time Congress enacted the FAA, the ordinary meaning of the phrase “contracts of employment” was “agreements to do work.” In Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), the Supreme Court had noted Congress’s demonstrated concern when the FAA was enacted “with transportation workers and their necessary role in the free flow of goods.” Given that concern, it was logical to conclude that “both individuals who are independent contractors performing transportation work and employees performing that same work play the same necessary role in the free flow of goods.” For these reasons, the court declined to follow the lead of those courts that had simply assumed that contracts that established or purported to establish independent contractor relationships were not “contracts of employment” within the meaning of section 1. The court concluded that the contract in this case was excluded from the FAA’s reach.

Narrow Construction and Policy Favoring Arbitration

Having reached its decision, the court felt compelled to explain why it was unpersuaded by the two justifications that some district court decisions had put forth—namely, an interpretation that section 1 did not apply to independent contractors was consistent with the need expressed by the Supreme Court in Circuit City to narrowly construe section 1 and the liberal federal policy favoring arbitration. In the opinion of the court, neither consideration warranted a retreat from the ordinary meaning of the statutory text. The Supreme Court in Circuit City was addressing whether the phrase “engaged in . . . commerce” in section 1 exempted from the FAA all employment contracts. Nothing in Circuit City suggested that the need for a narrow construction overruled the plain meaning of the statutory language. Nor, as established by the Supreme Court, can the federal policy favoring arbitration override the plain text of a statute. Equal Emp’t Opportunity Comm’n v. Waffle House, Inc., 534 U.S. 295 (2002).

The First Circuit’s Decision

When confronted with a motion to compel arbitration under section 4 of the FAA, the district court, and not an arbitrator, must decide whether the section 1 exemption applied. In addition, transportation worker agreements that established or purported to establish independent contractor relationships were “contracts of employment” within the meaning of the section 1 exemption. Because the contract was within the section 1 exemption, the district court’s denial of the motion to compel arbitration was affirmed and the appeal dismissed for lack of appellate jurisdiction.

The court stressed that the holding that a transportation worker agreement that established or purported to establish an independent contractor relationship was a contract of employment under section 1 applied only when arbitration was sought under the FAA and had no impact on other avenues (such as state law) by which a party may compel arbitration.

The Dissent

In his dissent, District Judge Barbadoro agreed with the majority that the applicability of the section 1 exemption was a threshold matter for a district court to decide. But, in his view, the court did not need to decide the issue as to whether transportation-based independent contractor relationships were exempt from the FAA. The primary reason for his concern arose from the fact the court’s decision was based on “less than ideal” briefing and “without the aid of a well-developed district court record.”

The Supreme Court Weighs In

In a unanimous decision intended to resolve the split among the circuits, the Supreme Court agreed with the First Circuit that courts must determine the applicability of the section 1 exemption and independent contractors working in transportation fall within the scope of the exemption. In reaching its opinion, the Court focused on the statutory language and legislative intent of Congress when the FAA was passed in 1926. The Court reasoned that a delegation clause is not enforceable if the contract in which the clause appears triggers section 1’s “contracts of employment” exemption. Nor does the “severability principle” apply if the parties’ arbitration agreement does not fall within the coverage of the FAA. Researching the meaning of the word “employment,” the Court concluded that “employment” in 1926 was synonymous with “work,” noting that early twentieth-century decisions by the Supreme Court had used the phrase “contracts of employment” to describe work agreements involving independent contractors, as had many state court decisions. And the act itself excluded “contracts of employment of . . . any . . . class of workers engaged in foreign or interstate commerce.” Thus, the Court concluded the section 1 exemption applied even when there was “independent contractor” language in a transportation worker agreement. In his opinion, Justice Gorsuch noted that section 1 referred to a “class of workers” rather than to a “class of employees.”

The Court declined to rule on whether judges have the power beyond the act itself to stay litigation in favor of an alternative dispute resolution mechanism of the parties’ choosing.

Concurring Opinion

Although concurring with the decision in this case that “words generally should be interpreted as taking their ordinary meaning at the time Congress enacted the statute,” Justice Ginsburg reminded the Court that “words in statutes can enlarge or contract their scope as other changes, in law or in the world, require their application to new instances or make old applications anachronistic.” New Prime Inc. v. Oliveira, No. 17-340 (Jan. 15, 2019) (Ginsburg, J., concurring) (quoting West v. Gibson, 527 U.S. 212 (1999)).

Conclusion

For employers engaged in the transportation industry, the Court’s decision has largely foreclosed for the present the ability to enforce arbitration agreements with workers merely by classifying them as “independent contractors.” The Court, however, did leave open the possibility that a judge might be able to stay litigation in a case involving a “contract of employment” and order the parties to engage in the dispute resolution mechanism agreed to by the parties.

P. Jean Baker is a vice president with the American Arbitration Association in its Washington, D.C., office and editor of the ABA Section of Litigation Alternative Dispute Resolution Committee’s quarterly newsletter.


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