The Federal Arbitration Act (FAA) requires courts to enforce private arbitration provisions contained in agreements between private parties. But the U.S. Supreme Court recently carved out an exception to the otherwise expansive scope of the law. Relying upon Section 1 of the FAA, which provides that “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 Court in New Prime Inc. v. Oliveira ruled (1) that a court rather than an arbitrator should decide if the dispute is subject to arbitration and (2) that “contracts of employment” encompass both employees and independent contractors and therefore the court should not compel arbitration between these parties.
New Prime Incorporated is a trucking company that entered into an operating agreement with Dominic Oliveira, a driver. This agreement identified Oliveira as an independent contractor and also contained a mandatory arbitration provision. Oliveira filed a class action against New Prime, which alleged that New Prime’s wages were unlawful. New Prime asked the court to stay litigation and compel arbitration. Both the District Court and First Circuit agreed with Oliveira’s argument that arbitration was not available because the operating agreement between himself and New Prime was a “contract of employment” as contemplated in Section 1 of the FAA.
The question before the U.S. Supreme Court was whether Section 1 of the FAA precluded enforcement of an arbitration agreement between a trucking company and a driver, in which the latter was described as an independent contractor. In a unanimous opinion, the Supreme Court agreed with the lower courts and decided that Section 1 of the FAA precluded enforcement of the arbitration provision that would otherwise govern the dispute between Oliveira and New Prime. Two discrete questions guided the Court’s analysis. The first question concerned whether the court or an arbitrator was the appropriate party to rule on the arbitrability of the dispute. The second question asked whether the statute allowed a court to compel arbitration in this instance.
New Prime relied on the delegation clause and severability doctrine to advance its argument that an arbitrator, not a court, was the proper tribunal to decide whether the dispute was arbitrable in the first place. A delegation clause gives an arbitrator the authority to rule on the threshold question of whether the dispute is subject to arbitration. Meanwhile, the severability doctrine provides that an arbitration clause contained within a larger contract is to be treated as a separate covenant and therefore is subject to an analysis independent from the terms of the broader agreement. The Supreme Court rejected this argument on the grounds that the FAA requires a court to examine whether the challenged arbitration falls within the scope of the FAA. Prima Paint Corp v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402 (1967).
Turning next to the question of whether the FAA allows the dispute between New Prime and Oliveira to be compelled to arbitrate, the Court surveyed the historical meaning of “contract of employment” and found that at the time the FAA was enacted, a “contract of employment” was simply a contract that work be performed without regard to whether the worker was an independent contractor or an employee as we now distinguish the two. Under the Court’s reasoning, because the exclusion of Section 1 of the FAA cannot be read to distinguish between employees and independent contractors, Oliveira was a worker engaged in interstate commerce (a notion no one disputed). The parties, therefore, could not be compelled to submit their dispute to arbitration.
Broader Implications of this Decision and Unresolved Issues
New Prime v. Oliveira is a reminder that Section 1 of the FAA may not be used to compel arbitration in disputes involving the “contracts of employment” for certain transportation workers. For the transportation industry, it is important to note that the Court ultimately did not make any distinction between independent contractor and employee for the purpose of Section 1 of the FAA. Rather, the Court concluded that as long as the worker was “engaged in foreign or interstate commerce” then the employer cannot compel its workers to arbitrate. This ruling does not shut the door on future litigation over the precise contours of the transportation workforce. Future litigation over the scope of FAA Section 1 could hinge on closer questions of which persons belong to the “class of workers engaged in foreign or interstate commerce.”