Does the Federal Arbitration Act’s Exemption For Contracts of Employment of Workers Engaged in Interstate Commerce Permit a District Court to Compel Arbitration?
Does the Federal Arbitration Act’s Exemption For Contracts of Employment of Workers Engaged in Interstate Commerce Permit a District Court to Compel Arbitration?
The Supreme Court is asked to resolve a circuit split and determine whether the Federal Arbitration Act’s exemption for contracts of employment of workers engaged in interstate commerce permits a district court to compel arbitration.
New Prime v. Oliveira
Docket No. 17-340
Argument Date: October 3, 2018
From: The First Circuit
by Jay E. Grenig
Professor of Law Emeritus, Marquette University Law School
Is a dispute over applicability of the FAA’s Section 1 exemption an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause?
Is the FAA’s Section 1 exemption, which applies on its face only to “contracts of employment,” inapplicable to independent contractor agreements?
New Prime, Inc. (Prime) operates an interstate trucking company. Under its Student Truck Driver Program, Prime recruits and trains new drivers. Prime claims its program offers paid apprenticeship Commercial Driver’s License (CDL) training. After attending a four-day orientation, student drivers hit the road with a Prime truck driver, who acts as an on-the-job instructor. In this phase of the apprenticeship program, student drivers must log 10,000 miles as a driver or passenger, and, apart from an advance of $200 per week for food (which eventually must be repaid), the apprentices are not paid.
After completing the supervised-driving period, the student driver takes the examination for a CDL and then must drive 30,000 more miles as a B2 company driver trainee. Prime pays its B2 trainees fourteen cents per mile. At the conclusion of the B2 trainee portion of the apprenticeship program, the apprentices attend additional orientation classes for approximately one week. Apprentices are not paid for time spent in this orientation.
Dominic Oliveira is a graduate of Prime’s apprenticeship program. He was not paid for the time he spent in orientation and was paid on a per-mile basis while driving as a B2 trainee. Prime docked his pay during this period to recoup the $200 advances it paid him during the supervised-driving period.
Drivers were relieved of paying tuition for the apprenticeship program as long as they remain with Prime for one year as either company drivers or independent contractors. After completing the program, drivers chose between the two options, and Prime offered a $100 bonus to those who elected independent-contractor status. When Oliveira finished the apprenticeship program, Prime representatives informed him he would make more money as an independent contractor than as a company driver. Prime directed Oliveira to Abacus Accounting—a company with offices on the second floor of Prime’s building—to assist him in forming a limited liability company. After Oliveira filled out a form provided by Abacus and listed his preferred LLC names, Abacus created Hallmark Trucking LLC on Oliveira’s behalf.
Prime then directed Oliveira to the offices of Success Leasing— located on the first floor of the same building—for help in securing a truck. After selecting a truck, Oliveira was informed that his first load of freight was ready to be trucked for Prime, and he was instructed to sign the highlighted portions of several documents before hitting the road. He hastily did so, and Prime steered him towards its company store, where he purchased—on credit—$5,000 worth of truck equipment and fuel.
Among the documents Oliveira signed was an Independent Contractor Operating Agreement between Prime and Hallmark. The contract specified that the relationship between the parties was that “of carrier and independent contractor and not an employer/employee relationship” and that “[Oliveira is] and shall be deemed for all purposes to be an independent contractor, not an employee of Prime.” Additionally, under the contract, Oliveira retained the rights to provide transportation services to companies besides Prime, to refuse to haul any load offered by Prime, and to determine his own driving times and delivery routes. The contract also obligated Oliveira to pay all operating and maintenance expenses, including taxes, incurred in connection with his use of the truck leased from Success. Finally, the contract contained an arbitration clause under which the parties agreed to arbitrate “any disputes arising under, arising out of or relating to [the contract],…including the arbitrability of disputes between the parties.”
Oliveira says that, while operating as Hallmark, Prime exercised significant control over his work. According to Oliveira, Prime required him to transport Prime shipments, mandated that he complete Prime training courses and abide by its procedures, and controlled his schedule. Because of Prime’s pervasive involvement in his trucking operation, Oliveira was unable to work for any other trucking or shipping companies.
Oliveira claims that Prime consistently shortchanged him during his time as an independent contractor. Eventually, Oliveira stopped driving for Prime. It was a short-lived separation, however; Prime rehired Oliveira a month later, this time as a company driver. Oliveira contends his job responsibilities as a company driver were “substantially identical” to those he had as an independent contractor.
Oliveira filed a class action against Prime in the U.S. District Court for the District of Massachusetts, alleging that Prime had violated the Fair Labor Standards Act (FLSA), as well as the Missouri minimum-wage statute, by failing to pay its truck drivers minimum wage. Oliveira also asserted a class claim for breach of contract and unjust enrichment and an individual claim for violation of Maine labor statutes. Prime moved to compel arbitration under the Federal Arbitration Act (FAA) and stay the proceedings or, alternatively, to dismiss the complaint for improper venue and the breach of contract/unjust enrichment count for failure to state a claim upon which relief may be granted. In its motion, Prime asserted that “Oliveira…entered into an Independent Contractor Operating Agreement with…Prime…to work as an owner-operator truck driver.”
In response, Oliveira argued that, because he was not a party to the contract between Prime and Hallmark, he could not be personally bound by any of its provisions, including the arbitration clause. He further contended that the motion to compel arbitration should be denied because, among other reasons, the contract is exempted from the FAA under Section 1. He also argued that the question of the applicability of the Section 1 exemption was one for the court, and not an arbitrator, to decide.
Prime disputed Oliveira’s argument that he could not be personally bound by the contract between Prime and Hallmark, stating that “Oliveira and Hallmark Trucking are factually one and the same.” Prime also took issue with both of Oliveira’s other arguments, contending that the Section 1 exemption does not include independent-contractor agreements and, in any event, the question of whether the Section 1 exemption applies is a question of arbitrability that the parties had delegated to the arbitrator.
The district court addressed the FAA issues and concluded the question of the applicability of the Section 1 exemption was for the court, and not an arbitrator, to decide. The court determined it could not yet answer that question because (1) the “contracts of employment” language of the Section 1 exemption does not extend to independent contractors; and (2) discovery was needed on the issue of whether Oliveira was a Prime employee or an independent contractor before the court could decide whether the contract was a contract of employment under the Section 1 exemption. The district court denied Prime’s motion to compel arbitration without prejudice and permitted the parties to conduct discovery on Oliveira’s employment status. The court determined Prime had failed to pay its truck drivers minimum wage. Oliveira v. New Prime, Inc., 141 F.Supp.3d 125 (D. Mass. 2016). Prime timely appealed to the U.S. Court of Appeals for the First Circuit.
The First Circuit first addressed the question of who decides the question of whether the Section 1 exemption applies, noting that the question was one of first impression in the First Circuit. The First Circuit stated that, where the parties dispute whether the district court has the authority to compel arbitration under the FAA, the extent of the arbitrator’s jurisdiction is of no concern. Instead, the court said it was concerned only with the question of whether the district court has authority to act under a federal statute. The court concluded that the question of whether the Section 1 exemption applies is an antecedent determination that must be made by the district court before arbitration can be compelled under the FAA.
The court next considered the question presented: whether the Section 1 exemption extends to transportation-worker agreements that establish or purport to establish independent-contractor relationships. The court noted that Section 1 exemption provides that nothing contained 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.” Prime did not dispute that Oliveira, whose work for Prime included driving a truck across state lines, is a “transportation worker” within the meaning of the Section 1 exemption. The court noted that, although the parties to the contract are Prime and Hallmark, Prime has, both below and on appeal, treated the contract as one between Oliveira and Prime. The court said it would do the same.
Because the parties did not dispute that Oliveira is a transportation worker under Section 1, the court said it need not address whether an LLC or other corporate entity can itself qualify as a transportation worker. The court also said it did not need to address the scope of the word “worker” in the residual clause of the Section 1 exemption. Accordingly, the court limited its focus to the issue of whether an agreement between a trucking company and an individual transportation worker can not be a “contract of employment” within the meaning of Section 1 if the agreement establishes or purports to establish an independent-contractor relationship.
The court declined to follow several district court decisions concluding that the Section 1 exemption does not extend to contracts establishing or purporting to establish an independent-contractor relationship. Stating that interpreting a federal statute is not simply a numbers game, the First Circuit said the fatal flaw in the district court authority relied on by Prime is a failure to closely examine the statutory text. Because Congress did not provide a definition for the phrase “contracts of employment” in the FAA, the court gave the term its ordinary meaning at the time Congress enacted the FAA in 1925.
The court determined that the phrase “contracts of employment” contained in Section 1 means simply “agreements to do work.” In addition to dictionary definitions, the court said this ordinary meaning of “contracts of employment” was further supported by other authorities from the era of the FAA’s enactment suggesting that the phrase can encompass agreements of independent contractors to perform work.
The court concluded that a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship is a contract of employment under Section 1. It stressed that its holding is limited to situations when only arbitration is sought under the FAA, and it has no impact on other avenues (such as state law) by which a party may compel arbitration. The court held that, when confronted with a motion to compel arbitration under Section 4 of the FAA, the district court, and not the arbitrator, must decide whether the Section 1 exemption applies.
Additionally, the court held that transportation-worker agreements establishing or purporting to establish independent-contractor relationships are “contracts of employment” within the meaning of the Section 1 exemption. Because the contract in this case is within the Section 1 exemption, the court stated the FAA did not apply. Oliveira v. New Prime, Inc., 857 F.3d 7 (1st Cir. 2017).
The Supreme Court granted New Prime’s petition for review. New Prime, Inc. v. Oliveira, 138 S. Ct. 1164 (2018).
Enacted in 1925, the Federal Arbitration Act (FAA) requires courts to enforce agreements to arbitrate disputes, foreclosing litigation over those disputes. The Act has an explicit exception for disputes arising from the employment of transportation workers: “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”
The FAA’s exemption provision was written to ensure that the Act would not affect “contracts of employment” of interstate transportation workers. The Act, however, does not define “employment” or “contracts of employment.”
Prime argues that where a contract contains a valid delegation clause assigning arbitrability questions to an arbitrator, the question whether the contract is a “contract of employment” within the meaning of Section 1 of the FAA is an arbitrability issue that must be submitted to arbitration. According to Prime, the FAA must be interpreted against the background principle that a bargained-for arbitration agreement is enforceable so long as the agreement is susceptible to an interpretation covering the asserted dispute. Prime explains that this exacting standard is necessary because courts must pay due regard to the liberal federal policy favoring arbitration. Prime argues that the First Circuit’s refusal to enforce the parties’ bargained-for delegation clause flouts the Supreme Court’s commands, usurping the authority to decide an important arbitrability issue notwithstanding the parties’ express agreement that an arbitrator should resolve the issue.
Oliveira argues that the FAA prohibits courts from using it to enforce any arbitration clause contained in a transportation worker’s contract of employment, and there is no exception for delegation clauses. Oliveira says that the contention that courts must rely on the FAA to enforce a delegation clause before determining whether the statute even applies defies logic as well as the plain text of the FAA.
Prime contends that the text, historical context, and purpose of the FAA leave no doubt that contracts of employment exempted from arbitration under Section 1 include only those agreements that purport to establish an employer-employee relationship under common-law agency principles, and not independent-contractor agreements. Prime reasons that, at the time the FAA was enacted, just as today, the plain meaning of the term “contracts of employment” encompassed only contracts between an employer and an employee that stated the terms and conditions of employment.
Prime explains that the distinction between employees and independent contractors goes back centuries and was well understood when Congress enacted the FAA. Prime’s position that reading “contracts of employment” to include independent contractor agreements contradicts the plain language of the statute, frustrates the statute’s purpose, and violates the Court’s admonition that the Section 1 exemption be given a narrow and precise reading.
Prime argues that the determination of whether a contract is a “contract of employment” or something else (such as an independent-contractor agreement) for purposes of Section 1 of the FAA must be made by looking only at the relationship described within the four corners of the contract. It says that no discovery or mini-trial into the nature of the parties’ interactions is necessary or appropriate under the FAA.
Oliveira responds that Prime does not cite a single source contemporary with the enactment of the FAA in 1925, pointing out that Prime relies on a dictionary published in 2014, relying on the word “employee” rather than the actual phrase used by Congress— “contracts of employment.” According to Oliveira, in 1925 when the FAA was passed, the phrase “contracts of employment” had only one meaning—agreements to perform work. Oliveira asserts that the employment status of the worker was irrelevant.
Oliveira reasons that the history, purpose, and statutory context of the transportation-worker exemption all support the conclusion that the FAA incorporates this ordinary meaning. Explaining that Congress exempted transportation workers from the FAA to avoid unsettling previously enacted dispute resolution statutes governing transportation workers, Oliveira contends that it makes perfect sense that Congress exempted all transportation workers’ agreements to perform work—not just of common-law servants. If it hadn’t, Oliveira says, it would have disrupted the preexisting dispute resolution schemes.
Prime claims the Independent Contractor Operator Agreements executed between New Prime and Oliveira are not contracts of employment. Prime claims Oliveira entered into the agreements as proprietor of his own limited liability company, Hallmark Trucking LLC. Because the Section 1 exemption is inapplicable to the contracts between Prime and Oliveira, Prime concludes, the First Circuit should have compelled arbitration of the parties’ dispute under the FAA.
Oliveira concludes that the Supreme Court’s role is to enforce the text of statutes as written. If Prime believes it would be good policy to rewrite the FAA, Oliveira says Prime must direct its arguments to Congress, not the Supreme Court.
The Supreme Court is called upon to resolve a dispute between circuits with respect to who decides whether the Section 1 exemption applies. In addition to the First Circuit, the Eighth and Ninth Circuits have also considered the issue.
In Green v. SuperShuttle International, Inc., 653 F.3d 766 (8th Cir. 2011), the Eighth Circuit held that the question of whether the Section 1 exemption applies is a question of arbitrability that must be decided by the arbitrator where the parties have delegated such questions to the arbitrator. In Green, the plaintiffs, a class of shuttle-bus drivers, alleged the defendant, a shuttle-bus company, misclassified the drivers as franchisees instead of classifying them as employees. When the defendant moved under the FAA to compel arbitration pursuant to the arbitration clause contained in the parties’ contracts, the plaintiffs countered that their contract was outside the scope of the FAA by virtue of the Section 1 exemption. The Eighth Circuit upheld the district court’s grant of the defendant’s motion, concluding that “[a]pplication of the FAA’s transportation worker exemption is a threshold question of arbitrability” in the parties’ dispute. Because the parties’ agreements incorporated the American Arbitration Association (AAA) rules, which provide that the arbitrator has the power to determine his or her own jurisdiction, the court concluded that the parties agreed to allow the arbitrator to determine threshold questions of arbitrability, including the applicability of the Section 1 exemption.
In re Van Dusen, 654 F.3d 838 (9th Cir. 2011), the plaintiffs, interstate truck drivers, alleged that one of the defendants, a trucking company, misclassified its truck drivers as independent contractors to circumvent the requirements of the FLSA and parallel state laws. The defendant moved to compel arbitration under the FAA, and the plaintiffs opposed that motion, asserting that the Section 1 exemption applied to their contracts. The district court ordered arbitration, concluding that the question of whether the Section 1 exemption applied was one for the arbitrator to decide in the first instance. After the district court refused the plaintiffs’ request for certification of an interlocutory appeal, the plaintiffs sought mandamus relief before the Ninth Circuit.
The Ninth Circuit ultimately declined to issue the extraordinary remedy of mandamus relief because the district court’s conclusion was not clearly erroneous in light of the dearth of federal appellate authority addressing the issue and the general federal policy in favor of arbitration. The court nonetheless outlined why “the best reading of the law requires the district court to assess whether [the Section] 1 exemption applies before ordering arbitration” under the FAA. The court explained that, because a district court’s authority to compel arbitration under the FAA exists only where the Act applies, “a district court has no authority to compel arbitration under Section 4 [of the FAA] where Section 1 exempts the underlying contract from the FAA’s provisions.” The court elaborated:
In essence, [the d]efendants and the [d]istrict [c]ourt have adopted the position that contracting parties may invoke the authority of the FAA to decide the question of whether the parties can invoke the authority of the FAA. This position puts the cart before the horse: Section 4 has simply no applicability where Section 1 exempts a contract from the FAA, and private contracting parties cannot, through the insertion of a delegation clause, confer authority upon a district court that Congress chose to withhold.
The court also concluded that the question of whether the Section 1 exemption applies does not fit within the definition of questions of arbitrability.
Jay E. Grenig is a Professor of Law Emeritus at Marquette University Law School in Milwaukee, Wisconsin. Prof. Grenig is author of Alternative Dispute Resolution, published by Thomson Reuters. He can be reached at firstname.lastname@example.org or 262.646.3324.
PREVIEW of United States Supreme Court Cases 46, no. 1 (October 1, 2018): 21–25. © 2018 American Bar Association
In Support of Petitioner New Prime, Inc.
Chamber of Commerce of the United States of America and the Society for Human Resource Management (Andrew J. Pincus, 202.263.3220)
American Trucking Associations, Inc. (Richard Pianka, 703.838.1889)
New England Legal Foundation (Benjamin G. Robbins, 617.695.3660)
Customized Logistics and Delivery Association (Robert G. Hulteng, 415.677.3131)
In Support of Respondent Dominic Oliveira
Steve Viscelli, Domingo Avalos, Gabriel Procel, Brion Gray, James Zuber, Hector Zelaya, Desiree Ann Wood, The Wage Justice 25 PREVIEW of United States Supreme Court Cases
Center and Real Women in Trucking, Inc. (D. Michael Dale, 503.525.8454)
Constitutional Accountability Center (Brianne J. Gorod, (202.296.6889)
International Brotherhood of Teamsters, National Employment Law Project, Inc., Economic Policy Institute, and National Employment Lawyers Association (Catherine K. Ruckelshaus, 646.693.8221)
Statutory Construction Scholars (Peter Romer-Friedman, 202.847.4400)
Massachusetts, California, Connecticut, the District of Columbia, Illinois, Maryland, Minnesota, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Vermont, Virginia, and Washington (Karla E. Zarbo, 617.727.2200)
Public Citizen, Inc. (Scott L. Nelson, 202.588.1000)
Owner-Operator Independent Drivers Association, Inc. (Paul D. Cullen, Jr., 202.944.8600)
Employment Law Scholars (Anna P. Prakash, 612.256.3200)
Senator Sheldon Whitehouse (Sheldon Whitehouse, 202.224.2921)
American Association for Justice (Gerson H. Smoger, 972.243.5297)
Historians (Sachin S. Pandya, 860.570.5169)