Supreme Court Calls Into Question Arbitration of Employee Claims

In the latest edition of arbitration clause roulette, opponents of arbitration (e.g. employees) got a huge win in New Prime Inc. v. Oliveira.

In New Prime, the U.S. Supreme Court determined whether trucking companies could compel truck drivers into arbitration (and prevent the drivers from filing class action wage and hour lawsuits), solely by classifying the drivers as “independent contractors.” The Court said the companies could not and sided with the driver, allowing his lawsuit to proceed to trial. 

The case turned on language in the Federal Arbitration Act (FAA), passed by Congress in 1925, and use of the term “contract of employment.” The FAA generally requires that courts enforce the parties’ pre-litigation agreement to arbitrate disputes. However, the FAA does not apply (thus, arbitration cannot be compelled) to “contracts of employment” for certain transportation workers. New Prime claimed that this exception to the FAA didn’t apply to Oliveira because his contract specified he was an independent contractor, not an employee, and thus, arbitration could be compelled.

In 1925, the term “contract of employment” didn’t make a distinction between independent contractors and employees. The Court found that Congress intended the term to cover any agreement to work in exchange for pay.  Since the specific type of employment relationship (contractor vs. employee) wasn’t spelled out in the FAA, the term “contract of employment” couldn’t be limited solely to contracts for employees. Therefore, truck drivers cannot be compelled to arbitrate under the FAA, regardless of whether they are employees or independent contractors.

While this decision is limited to the interstate transportation industry, it is a curious development in what had been an increasingly arbitration-friendly landscape (for a recent example, see the Supreme Court’s unanimous decision in Henry Schein Inc. v. Archer & White Sales Inc., finding that the arbitrator should decide whether a claim is arbitrable, even if the claim for arbitration is “wholly groundless”). 

The effect of New Prime is being closely watched by employers faced with independent contractor misclassification suits, since the Court found that the term used in the contract with Oliveira (saying that he was an independent contractor) was not determinative of whether he fell within the Federal Arbitration Act’s Section 1 exclusion for disputes involving transportation workers. However, the Court took no position on whether Oliveira was properly classified as an independent contractor, so time will tell what effect this decision will have (if any) on misclassification suits going forward.