Employment Arbitration

January, 2019



There has been a flurry of activity at the U.S. Supreme Court concerning the resolution of employment disputes, not through court litigation, but by arbitration.  On January 15, 2019, the Court ruled that a trucking company can not compel arbitration in a wage and hour case brought by a truck driver who was classified as an independent contractor rather than as an employee.  New Prime Inc. v. Oliveira, No. 17-340.

Full disclosure:  I am an employment and commercial arbitrator with the American Arbitration Association, a commercial arbitrator with the American Dispute Resolution Center, Inc. and an arbitrator with the Financial Industry Regulatory Authority.

In an arbitration agreement, or a contract providing for the resolution of employment disputes through private arbitration, employers and employees can agree in advance to have a neutral third party, i.e. an arbitrator who is usually an attorney, to decide legal claims rather than resorting to court litigation.  Many times, employees unknowingly sign forms upon hire allowing arbitration.  Resolution through arbitration is usually more timely and less costly than court litigation, although claimants may forfeit certain rights and possibly remedies that would otherwise be available in a court of law.

Under the Federal Arbitration Act, (FAA), businesses can generally enforce reasonably drafted agreements to arbitrate work-related claims.  However, Section 1 of the FAA has an exception for “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”  Therefore, transportation employees involved in interstate commerce, such as long-haul truck drivers, can not be forced to arbitrate employment claims.

The question in New Prime was whether this exception applies only to employees or also to independent contractors.  The answer:  the high court affirmed that the exception applies to independent contractors.  “We see here no evidence that a ‘contract of employment’ necessarily signaled a formal employer-employee or master-servant relationship.”  Justice Neil Gorsuch wrote for the 8-0 court, with Justice Kavanaugh taking no part in the consideration or decision of the case.

Some considerations include 1) while this decision is important to the transportation industry, it may very well be limited to that industry; 2) although an independent driver’s agreement falls under the FAA exception, it still could be enforced under state arbitration laws.

The Facts of New Prime

The truck driver brought a class-action complaint in court against an interstate trucking company, alleging that he and other independent contractors were misclassified and due certain employment benefits, such as minimum wage payments.

Although the driver has signed an arbitration agreement with the trucking company, he claimed that the FAA’s exception for certain transportation employees applied to employees and independent contractors alike.  The trucking company argued that the exception applied only to employees and that arbitration agreements can be enforced against independent contractors.

The First Circuit Court of Appeals ruled in the driver’s favor and held that the independent contractor agreement was a “contract of employment” and was exempt from the FAA, allowing him to proceed to court.  The Supreme Court upheld the First Circuit’s ruling.

The Question of Arbitrability

Sometimes, arbitration agreements include a clause stating that the issue of whether the case should be heard by an arbitrator or the courts, i.e., “arbitrability,” is reserved for the arbitrator to decide.

In another Supreme Court arbitration decision decided this month, the high court found that an arbitrator should decide the threshold question of whether an issue is arbitrable, even when there is language suggesting that there should be no arbitration.  Schein, Inc. v. Archer & White Sales, Inc.

The issue in Schein was whether the FAA permits a court to decline to enforce an agreement that delegates arbitrability questions to an arbitrator, if the court finds the arbitrability claim “wholly frivolous.” 

In his first opinion, Justice Kavanaugh issued a pro-arbitration decision that won unanimous support from the other justices.  “The Act [FAA] does not contain a ‘wholly groundless exception’ and we are not at liberty to rewrite the statute passed by Congress and signed by the president.  When the parties’ contract delegates the arbitrability question to the arbitrator, the courts must respect the parties’ decision as embodied in the contract.”

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