Labor & Employment Law Daily Supreme Court mulls whether independent contractor agreements are ‘contracts of employment’ under FAA exemption
Friday, October 5, 2018

Supreme Court mulls whether independent contractor agreements are ‘contracts of employment’ under FAA exemption

By Pamela Wolf, J.D.

On October 3, the Supreme Court heard arguments on the questions of whether the Federal Arbitration Act’s Section 1 exemption is a question of arbitrability to be decided by an arbitrator or a court, and whether the same exemption, which applies on its face only to “contracts of employment,” is inapplicable to independent contractor agreements. By “expanding the Section 1 exemption beyond its textual limit” and refusing to compel arbitration, the First Circuit below created conflicts with the Eighth and Ninth Circuits (and the California Court of Appeal), and is now an outlier jurisdiction in conflict with more than a dozen district court decisions around the country, according to the petition for certiorari filed by the employer in New Prime, Inc. v. Oliveira. The First Circuit also violated the Supreme Court’s 2001 holding in Circuit City Stores, Inc. v. Adams, the petitioner asserts.

Appeals court ruling. The First Circuit held that when confronted with a motion to compel arbitration under Section 4 of the FAA, the district court, not the arbitrator, must decide whether the FAA’s Section 1 exemption applies. Moreover, transportation-worker agreements establishing or purporting to establish independent contractor relationships are “contracts of employment” within the meaning of the exemption, the appeals court found. In this case, because the contract between a truck driver and NewPrime, Inc., was within the exemption, the FAA did not apply, and the court thus lacked jurisdiction. Accordingly, the First Circuit affirmed the lower court’s denial of New Prime’s motion to compel arbitration of the truck driver’s claims against it and dismissed the appeal.

Another FAA end-run? New Prime has argued that the High Court has “repeatedly instructed lower courts to enforce arbitration agreements containing class waivers, as it is up to the parties to determine the manner of arbitration in which they wish to engage.” The First Circuit’s ruling “reflects the latest effort by a lower court to avoid these dictates and invalidate an arbitration agreement containing a class waiver—a tactic with which this Court is all too familiar,” New Prime’s petition argues. The First Circuit did so “through a nonsensical interpretation of the FAA itself.” Section 1 exempts a narrow class of transportation workers from the purview of the statute, those who have signed “contracts of employment.”

Do “contracts for employment” include only “employees?” Theodore J. Boutrous, Jr. (Gibson, Dunn & Crutcher) for New Prime, Inc., argued that even before the FAA, the High Court has repeatedly said that “if Congress uses words like ‘employment’ or ‘employee’ or ‘employer’ in a statute without further helpful definition, it intends for the common law agency rules to govern that govern an employer and employee relationship.” Moreover, in the Section 1 exemption, “Congress did not define or suggest it was coming up with a new, creative interpretation of the word ‘employment’ or ‘employees,’ which was also used in that clause.”

What about “workers?” But Justice Sotomayor questioned Boutrous’ assertion, asking about the word “worker” used in the very same clause and parroting its language: “Shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” She said Congress used a much broader term than “employees,” it used “workers.” “Shouldn’t that inform what it meant by contract of employment?” queried Sotomayor.

Not just about the employee/employer relationship. Along similar lines, Chief Justice Roberts observed that the petitioner had quickly shifted the discussion on contracts of employment to whether there is an employee/employer relationship. “And simply because someone would be considered or not considered an employee doesn’t necessarily answer the question of whether it’s a contract of employment,” Roberts said. “People think naturally of employing an independent contractor … the question is not employee/employer. It’s employment.” Roberts observed that employment “in many of these contexts has a broader scope than the existence of an employee/employer relationship.”

Justice Sotomayor noted that Boutrous’ opponent had cited many cases in which courts had used “contract of employment” to mean employees and independent contractors.

Historical meaning. Justice Gorsuch honed in on the fact that the employee’s briefings documented that in 1925, when the FAA was enacted, they didn’t necessarily “distinguish between independent contractors and employees with the degree of care that the law has subsequently come to use,” noting also that the statute must be interpreted “as a reasonable reader would have at that time.”

Boutrous cited cases disputing the historical meaning raised by Justice Gorsuch. In addition he said, “I think it’s also important that it’s been nearly 100 years, and no court had ever decided that the words ‘contracts of employment,’ which are pretty clear, mean something completely different.”

New Prime uses it that way, too. Gorsuch pointed to New Prime’s website, though, saying that “it speaks of employing, I believe—I can’t remember the exact variation of the word—but it treats these independent contractors as employing them.”

Everybody, including Congress. Beginning her argument with the historical interpretation, Jennifer Bennett (Public Justice, PC) for Dominic Oliveira, said, “Whether you look at statutes, case law, newspaper articles, even actual contracts themselves, the result is the same: The vast majority of sources call independent contractors’ agreements to perform work ‘contracts of employment.’”

But she went even further to say that Congress also repeatedly used the phrase that way. “Congress passed multiple statutes contemporaneous with the FAA that all used the phrase ‘contracts of employment’ to refer to independent contractors’ agreements to perform work,” she said.

Class of workers. Returning to “contract of employment involving a class of workers engaged in foreign or interstate commerce”—language referred to earlier by Justice Sotomayor, Justice Alito asked whether that applies to “all independent contractors who are engaged to perform some type of work.”

According to Bennett, it would “apply to all independent contractors who are engaged in foreign or interstate commerce,” which the High Court said is quite narrow. “It’s people who are directly involved in transporting goods or so closely associated to it, to be assumed to be essentially directly involved,” Bennett said.

Only workers, not companies. Trying to further clarify, Justice Kagan posed a hypothetical: “So suppose that Amazon contracts with FedEx or UPS to ship all its products and they want to send their disputes to arbitration. Does that fall within the Act or does that fall within this exemption?”

It would not fall within the exemption and thus would be subject to the FAA, Bennett said. The reason is that the FAA exempts a class of workers engaged in foreign or interstate commerce, not companies engaged in foreign or interstate commerce, according to the employee’s attorney. “FedEx … wouldn’t be considered a worker. They would be considered a company,” she said.

Justice Kagan asked if in every case you have to determine whether a worker or a company is involved.

“That’s correct,” Bennet replied. “And in most cases, that won’t be difficult.” The attorney said that in this instance that is not disputed. She has seen very few cases where that is in dispute. “But it’s true that if in the rare case where it is, the court would have to figure that out. And that’s based on the text of the FAA. The FAA says we exempt these kinds of contracts,” she said.

Arbitrability. On the issue of arbitrability, Chief Justice Roberts and Justice Breyer underscored that this case is different from the usual question of whether there was an arbitration clause governing arbitrability, because it is really about the interpretation of a statute.

Chief Justice Roberts was also confused when Boutrous said that he would be happy to have the district court decide arbitrability (which it had in fact done). Boutrous said he was not abandoning that issue, but the main problem was in what the district court had ordered—a trial on the main issue of whether an independent contractor agreement was a “contract for employment” under the exemption.

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