SCOTUS rejects mandatory arbitration for transportation workers classified as independent contractors

Last week the Supreme Court dropped its unanimous decision in New Prime v. Oliveira penned by Justice Gorsuch, weighing in on the application of the Federal Arbitration Act to independent contractors of a transportation company. Many liberal media outlets describe the opinion as a win for workers because the court held in favor of the workers rather than the employer. Even articles taking issue with Justice Gorsuch’s textualist approach to the Federal Arbitration Act consider the opinion a win without considering its broader effect that employer-side employment lawyers will surely grasp. Viewed from its broader consequences, New Prime is not without collateral damage.

A brief history of employment law and the Federal Arbitration Act

Mandatory arbitration became commonplace in employment contracts and employment agreements as a condition of employment after the Supreme Court heavily rewrote the Federal Arbitration Act in the 1980s.

In 1925 Congress passed the Federal Arbitration Act which enforces arbitration clauses in contracts covered by the act. The Federal Arbitration Act was designed to create a meaningful dispute resolution framework between businesses that conducted transactions across the country. It intended to avoid situations in which a dispute arose over a purchase agreement and the parties might end up fighting in court for a long period of time or maneuvering a dispute into a local court that might heavily favor one party over the other. Instead the parties could agree to have a dispute resolved quickly by an arbitrator who was impartial and likely had familiarity with transactions in that industry.

Everybody seemed to agree with this history until we reached the excess capitalism of the 1980s. In the late 1970s and early 1980s enterprising businesses, primarily in banking and lending, fought to repurpose the Federal Arbitration Act to apply to consumer transactions. Courts agreed and mandatory arbitration agreements became part of many consumer agreements for credit cards, bank accounts, utility services and sometimes even retail purchases.

Arbitration in consumer agreements provides businesses several advantages over litigation. Arbitration proceedings are often cheaper and result in smaller adverse judgments. Companies have less incentive to settle and even when they lose they lose less. Arbitration proceedings are framed by the party demanding arbitration so it is often a friendly environment and avoids courts which may be more impartial. Arbitration decisions are often not published so even when companies suffer adverse judgments they are concealed from the public which makes it harder for consumers to assess their potential relief in this forum.

Companies liked arbitration so much that they expanded mandatory arbitration to employment agreements. Employers in the 1980s and 1990s began requiring employees to sign forced arbitration agreements for employee claims under a wide range of employment law and labor law claims. This was different from labor arbitration under a collective bargaining agreement in which the union and employer negotiated the terms of arbitration proceedings. Under these forced arbitration agreements, employers held absolute control over arbitration terms. Employees signed the agreements or lost their jobs.

Circuit City v. Adams and the FAA in employment agreements

In 2001 the Supreme Court rendered judgment in Circuit City v. Adams holding that the FAA applied to employment agreements. Adams applied for a job with Circuit City in which the employment application contained a unilateral agreement to arbitrate all employment claims. Adams later filed an employment discrimination lawsuit against Circuit City, which attempted to move the lawsuit into arbitration pursuant to this agreement.

The Supreme Court majority took on a tortured reading of the Federal Arbitration Act to reach this conclusion. Within the FAA are two relevant passages:

Section 1: “…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.

Section 2: “A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

At issue in Circuit City is how expansively Section 1 limits the FAA’s application to employment contracts and the extent any employment agreement not exempted by Section 1 falls within Section 2. The majority applies two different cannons of statutory construction to give the word “commerce” two opposing definitions in the same statute. According to the majority, commerce in Section 1 must be narrowly defined because the section describes some of the workers. The applicable cannon of statutory construction mandates when a general term follows specific terms, the general term is interpreted as including items like the specific. As a result, the employees exempted by Section 1 only include employees involved in transportation (like railway workers and seamen). All other employee contracts are not exempt. Conversely, commerce in Section 2 must be expansively defined because it lacks any limiting language and the FAA intended to expansively cover the extent of Congress’s power under the Commerce Clause.

(The reasoning here is awful and well excoriated by the dissenting opinions. It is well worth exploring but beyond the scope of this post.)

As a result of Circuit City we have expansive legal protection for forced arbitration in employment with very little limitation.

New Prime v. Oliveira and forced arbitration of independent contractors

New Prime deals with relationship between the FAA and non-employee workers. Here Justice Gorsuch’s majority opinion provides further confusion into interpreting the FAA in the employment context although he finds an interpretation that favors the workers in this particular situation.

New Prime is a transportation company that hires truck drivers as independent contractors. As part of their contracts the drivers agree to arbitrate claims related to their work on an individual basis. Oliveira filed a class action lawsuit on behalf of himself and his co-workers alleging wage-based claims. New Prime sought to remove the lawsuit to arbitration and chop up the class action into individual actions under its arbitration agreement.

Justice Gorsuch applies a supposed textualist approach to determine the drivers have contracts of employment under the Federal Arbitration Agreement. He advances the position that language of the act must be interpreted within the ordinary meaning of its time. He finds that in 1925 there was no distinction between independent contractor and employee and the term employment applied to all employment relationships. Truck drivers are as well employees like railway workers and sea workers therefore they are the types of workers covered even among Circuit City‘s limited scope of Section 1. Therefore, although New Prime did not employ the drivers as employees their employment agreement fell within the FAA’s contract of employment language.

New Prime gives us an even more confusing view of the Federal Arbitration Act. Combining New Prime and Circuit City we have no consistent standard to interpret the statute. On one hand, New Prime tells us to read the statute in the context of its time but Circuit City tells us to read the statute in its modern setting in which commerce is defined in a much broader term than at the time the FAA was enacted. We are forced to read Section 2 in a post-Wickard, everything-is-commerce interpretation but read section 2 in a pre-Wickard interpretation where commerce is narrowly defined. It’s almost like this kind of textualism is goal-oriented.

Why New Prime isn’t worth quite the praise it gets

Across liberal and legal press one can quickly find piece after piece congratulating Justice Gorsuch for overlooking his traditionally pro-business position to give the day to the workers in New Prime. (For example, here, here, here, here and here.) That oversells the inevitable impact of this opinion for labor law and employment law.

Sure, New Prime is a win for workers engaged in transportation jobs like those covered by Circuit City‘s interpretation of workers covered by Section 1’s exemption. Employers may no longer get away with properly or improperly defining these workers as independent contractors, rather than employees, to force them into mandatory arbitration agreements. It does not help them gain any other protections as employees but it does avoid mandatory arbitration. This is certainly a tremendous win for transportation workers regardless of their classification as employee or independent contractor.

However, New Prime‘s interpretation of Section 1 is not without collateral damage. Although all transportation workers may fall within New Prime‘s interpretation of Section 1’s exemption it does not mean those same workers may receive exemption under state law. In the end, all these workers may find themselves in mandatory arbitration anyway. It also does not help that New Prime doubles down on the narrow interpretation of Section 1 found in Circuit City. The greatest problem with New Prime is that it leaves little question that SCOTUS definitely views independent contractor relationships as well within the FAA’s scope. Enterprising plaintiff-side employment lawyers are likely to find reason to challenge applying the FAA to independent contractor relationships particularly in light of last year’s Epic Systems opinion (and its basis in AT&T Mobility v. Concepcion) upholding class action waivers in mandatory arbitration employment agreements.

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