Supreme Court Says Courts, Not Arbitrators, Must Review Classification of Employees

The Supreme Court affirmed that courts do have a central role in reviewing the nature of the employee's relationship to the employer.

** LEGAL UPDATE **

In a recent decision in New Prime Inc. v. Oliveira (2019), the U.S. Supreme Court gave an important procedural victory to certain employees subject to arbitration agreements. While the issues raised by the case might seem narrow, they could have important implications for workers and employers in the future, particularly in the transportation sector.

What Gave Rise to New Prime Litigation

New Prime Inc., who started the lawsuit that ended up before the Supreme Court, is an interstate trucking company based in Missouri. Dominic Oliveira worked there as a driver, under an “Independent Contractor Operating Agreement”—essentially, a form agreement that governed the relationship between truckers and the company.

That agreement contained a mandatory arbitration provision. Such clauses are becoming increasingly common in employment agreements of all sorts. Essentially, they require that any disputes between the parties—here, between the truckers and New Prime—could not be brought in a court, but would instead be brought before a private arbitrator who would issue a binding decision.

Notwithstanding that arbitration provision, Oliveira filed a class action lawsuit against New Prime, alleging that the company failed to comply with the provisions of the Fair Labor Standards Act, a federal statute that supports workers' ability to collect certain overtime wages.

New Prime responded by suing Oliveira to "compel" (that is, to force) arbitration to proceed, citing the Independent Contractor Operating Agreement. Under the Federal Arbitration Act ("FAA"), a party can ask a court to compel a signatory to an arbitration agreement to proceed in arbitration rather than public court. New Prime wanted Oliveira to honor his contractual commitment to arbitrate.

Oliveira countered that New Prime cannot compel arbitration because Section 1 of the FAA (9 U.S.C. § 1) specifically states 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." In other words, he argued, the FAA appears to exclude certain categories of workers engaged in interstate commerce—such as truckers like himself—from the otherwise strict requirements of the FAA to enforce arbitration agreements.

New Prime argued that whatever interpretation of Section 1 might apply should be determined by the arbitrator, and not by a public court. After all, New Prime contended, the parties had agreed to arbitrate all disputes rather than litigate them.

The trial court concluded that even though the parties had indeed agreed to arbitrate all issues, a court—and not an arbitrator—must determine whether or not the disputes between New Prime and Oliveira can even be arbitrated at all. The question of arbitrability is a gateway determination. The matter was appealed to the U.S. Court of Appeals for the First Circuit, which agreed with the trial court that whether the arbitration agreement applies to a transportation worker like Oliveira must be determined by a court, not a private arbitrator.

The U.S. Supreme Court agreed to review the case, likely because it involved a novel interpretative dispute about an important provision of the FAA.

Supreme Court Decides to Give Power to the Trial Court

In a unanimous 8-0 decision, Justice Neil Gorsuch affirmed the decision of the First Circuit. (Justice Brett Kavanaugh did not take part in the decision, as he was confirmed by the U.S. Senate several days after this case was argued).

The Court held that courts, in the first instance, must decide whether the FAA's exclusion of certain types of workers applies to a dispute before they can compel that dispute to arbitration. Here, that means that Oliveira’s independent contractor agreement with New Prime falls within the FAA's exception.

In considering the language of Section 1 of the FAA, the Supreme Court reasoned that courts have only the power to compel arbitration for arbitration agreements that involve either interstate commerce or maritime transactions. It thus stands to reason that the court itself must make a factual determination as to whether the agreement at issue falls into such a category.

The justices examined the meaning of the term “contracts of employment” within Section 1 as the phrase was used in 1925 when the FAA was passed. "A court’s authority to compel arbitration under the [FAA] does not extend to all private contracts, no matter how emphatically they may express a preference for arbitration," Justice Gorsuch wrote. "Instead, antecedent statutory provisions limit the scope of a court’s... powers to stay litigation and compel arbitration."

In other words, a court cannot compel arbitration, even if the parties agreed to arbitration, unless it determines that the underlying contract properly falls within the scope of the FAA.

So, Oliveira’s contractual relationship with New Prime may not fall within the FAA's intended scope, given the exclusions in Section 1. Accordingly, a court must make that determination in the first instance.

Conclusion and Impact of New Prime Decision

While this might seem like a narrow ruling on a legal issue, New Prime has potentially broad public policy consequences for the use of arbitration in employment agreements.

In recent decades, the U.S. Supreme Court has given heightened deference to arbitrators. However, in New Prime, the Court has affirmed that courts do have a central role in reviewing the nature of the employee's relationship to the employer, under Section 1 of the FAA.

Effective Date: January 15, 2019