If your driver agreements contain a requirement to arbitrate disputes, as of last week, that provision is no longer enforceable, according to the U.S. Supreme Court.

On January 15, 2019, the Supreme Court ruled unanimously 8-0 in the case of New Prime Inc. v. Oliveira that a contractual agreement to arbitrate disputes, often found in independent contractor agreements, is exempted from enforcement under the Federal Arbitration Act (“FAA”). New Prime, Inc. v. Oliveira, 528 U.S. __, 2019 WL 189342 (Jan. 15, 2019).

Specifically, the FAA mandates arbitration agreements to be enforced except where found in “contracts of employment” for workers engaged in interstate commerce. Interpreting the notion of “workers” and “contracts of employment” broadly, the Supreme Court held that both independent contractors and employee drivers, alike, could not be forced to arbitrate disputes.

Harkening back to the time of the FAA’s creation in 1925, “[a]t that time, a ‘contract of employment’ usually meant nothing more than an agreement to perform work,” said the Court. “As a result, most people then would have understood [the FAA] to exclude not only agreements between employers and employees but also agreements that require independent contractors to perform work.” The broad idea of a “worker” includes both employee drivers and independent contractors.

Importantly, this decision was an interpretation of the Federal Arbitration Act and not a broad determination that independent contractors are not distinct from employee drivers. They are distinct for many reasons. However, in the context of arbitration clauses, all are considered “workers” and their contracts are “contracts of employment” that may not have enforceable arbitration clauses under the FAA.

The Court’s opinion addressed two separate questions: (1) Does the court or the arbitrator decide whether an arbitration clause in a driver’s contract is enforceable, and (2) Does the phrase “contracts of employment” refer to both contracts with employees and also with independent contractors?

The Supreme Court held that (1) courts, not arbitrators, should decide whether an arbitration clause is a “contract of employment” for workers engaged in foreign or interstate commerce. It further held that (2) the phrase “contract of employment” applies to both employee drivers and independent contractors—all of whom are “workers” within foreign or interstate commerce.

The Court’s decision should not impact the careful analysis exercised by many in the trucking industry to determine whether a driver is an independent contractor or an employee. The ruling was limited to interpretation of the FAA. The Court was careful to say that it does not see any “evidence that a ‘contract of employment’ [as defined in the FAA] signal[s] a formal employer-employee or master-servant relationship.”

It is important to note that while the Supreme Court has held that arbitration clauses are no longer enforceable in contracts with drivers, this decision does not change the complex distinctions within state and federal law between independent contractors and employees. Transportation law and its judicial interpretation is complex.

This decision does not impact the enforceability of the vast majority of arbitration clauses. Arbitration agreements are enforceable in many types of employment contracts, broker-carrier agreements, severance agreements, leases and purchasing agreements, and a host of other contracts. Businesses are often well-served by arbitration, which keeps private disputes out of the public sector and promotes efficient management and resolution of disputes.

For more detailed information on this or any other transportation law question, we are happy to assist.

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