By Kristen M.J. Johnson, Esq. Taylor & Associates, Winter Haven
Just when we thought “full steam ahead” for arbitration clauses in employment contracts, stemming from the U.S. Supreme Court’s loyal adherence to the Federal Arbitration Act (“FAA”) in Epic Systems Corp. v. Lewis, the brakes seem to have slammed on again. In January, the Supreme Court held in New Prime v. Oliveira, that the FAA does have some limitations.
The earlier Epic Systems decision was seen by many as a business-friendly ruling, giving employers even greater ability to enforce arbitration agreements with their employees. The Epic Systems Court ruled that companies may include binding arbitration agreements in their employment contracts, and include within those agreements class action waivers. The collective bargaining assurances in the National Labor Relations Act (“NLRA”), the Court held, did not trump Congress’s intent in the FAA that arbitration agreements and class action waivers be binding. It concluded, “Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA-much less that it manifested a clear intention to displace the Arbitration Act.
A mere six months after the Epic Systems decision, along came New Prime-a somewhat surprising unanimous 8-0 decision finding a bright line exception to the F AA’s strict upholding of arbitration agreements. There, the Court held that the FAA does not mandate enforcement of arbitration agreements found in “contracts of employment” for workers engaged in interstate commerce. In other words, arbitration agreements with drivers and transportation “workers” may not be enforceable. 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. With over 15 million trucks on the road in the United States, this decision has far-reaching implications for the millions of drivers and other workers in the $740 billion dollar transportation industry, as well as for the companies that hire them.
In the New Prime opinion, the Court harkened back to the time of the F AA’s creation in 1925, saying that “[a]t that time, a ‘contract of employment’ usually meant nothing more than an agreement to perform work.” It continued, “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 New Prime decision was an interpretation of the Federal Arbitration Act and not a broad determination that independent contractors are not distinct from employee drivers (a common dispute in transportation-related employment agreements). Employees and independent contractor drivers remain distinct for many reasons and business reasons often drive the use of one versus the other. 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 in New Prime 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?
On these questions, the Supreme Court held that (1) courts, not arbitrators, should decide whether an arbitration clause in a driver’s contract is enforceable because the decision is a preliminary determination of whether the driver’s contract is a “contract of employment” for workers engaged in foreign or interstate commerce, and if it is, it would be exempt from enforcement under the FAA. 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 analysis exercised by many in the trucking industry to determine whether a driver is an independent contractor or an employee. The Supreme 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 masterservant relationship.” While the Supreme Court has held that arbitration clauses are no longer enforceable under the FAA 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. The ruling was limited to interpretation of the FAA-which is a federal statute-leaving untouched questions relating to the employee/independent contractor status of drivers and whether federal courts may compel arbitration where required under state law. It is also important to note that the New Prime 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.