Supreme Court Decision in “New Prime” May Have Limited Impact on Independent Contractor Misclassification Claims, Despite Some Commentators’ Exuberance and Others’ Despair

Shortly after the issuance of the Supreme Court’s decision earlier today in New Prime Inc. v. Oliveira, some commentators have referred to it as a watershed opinion preserving the right of workers including independent contractors to have their class action cases heard in court instead of before an arbitrator. Others have lamented the decision, worried that the Supreme Court has now foreclosed the right of companies to compel employees and independent contractor to arbitrate their workplace disputes under arbitration agreements the workers have signed.  But the Supreme Court’s decision may have little or no impact as to whether workers classified as independent contractors can be compelled to arbitrate their IC misclassification claims.

Why? Because the decision by the Supreme Court is limited to the Federal Arbitration Act (FAA) and turned on language found in Section 1 of the FAA that excludes from its coverage several types of transportation workers that are involved in interstate commerce.  In contrast to the FAA, state arbitration laws generally do not exclude those workers.  Thus, the New Prime decision may have little or no impact on the rights of companies to compel arbitration of any other workers’ disputes – whether the workers are classified as employees or independent contractors or whether they are involved in interstate transportation – if the company seeks to compel arbitration under a state arbitration law, instead of or in addition to the FAA.

Some lawyers representing workers – both employees and independent contractors – may argue that the federal arbitration law preempts these state laws.  But the courts generally have found state arbitration laws to be preempted by the FAA, which is intended to promote arbitration, only in instances where a state law places limits on arbitration – and it is likely that few if any state arbitration laws exclude transportation workers engaged in interstate commerce.

The Two Issues Decided By the Supreme Court  

The precise issue decided first by the Supreme Court in New Prime was whether a court or arbitrator should decide whether a transportation worker is excluded from the provisions of the FAA.  Justice Neil Gorsuch, who authored the decision, concluded that the courts, not an arbitrator, must decide the exclusion issue – even if the arbitration agreement directs this issue to the arbitrator to decide.  According to the Court’s opinion, before a court considers invoking its power to compel arbitration and “stay” litigation under the applicable sections of the FAA, it must determine if a worker is excluded under Section 1 of the FAA as an interstate transportation worker.  If the exclusion applies, the court cannot compel arbitration under the FAA.

New Prime, an intermodal trucking company, had argued that the threshold question of whether the exclusion applied should be determined by an arbitrator.  In rejecting that argument, the Supreme Court stated that the parties could not, by agreement, bypass the interstate transportation worker exclusion in Section 1 of the FAA.  According to Justice Gorsuch:  “The parties’ private agreement may be crystal clear and require arbitration of every question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum.”

The second issue decided was whether the exclusion for “contracts of employment of . . . [transportation] workers engaged in . . . interstate commerce refers only to contracts between employers and employees or also covers contracts between companies and independent contractors.” The Court examined the meaning of the term “contract of employment” at the time the FAA was enacted in 1925.  It concluded that dictionaries at the time “tended to treat ‘employment’ more or less as a synonym for ‘work.’”  The Court also found that Supreme Court cases in the early 20th century used the phrase “contract of employment” to describe “work arrangements involving independent contractors.”

The Supreme Court did not decide, though, whether Mr. Oliveira or any a particular worker – either an independent contractor or an employee – would be excluded under Section 1 of the FAA.  Mr. Oliveira and New Prime agreed that he was an interstate transportation worker.  That issue was not before the Supreme Court and now is left for the lower courts to decide in cases where the parties are in disagreement over the application of the exclusion to a particular worker or class of workers.  It is likely  plaintiffs’ class action lawyers will attempt to expand the reach of the exclusion by  characterizing a host of workers as being involved in the interstate commerce transportation industry. However, even if an individual or group of workers is excluded under the federal arbitration law, state arbitration laws may cover them and provide a statutory basis for compelling arbitration.

Takeaways and Tips

Many companies utilizing independent contractors have included arbitration clauses with class action waivers in their IC agreements. More have done so following last year’s decision by the U.S. Supreme Court in Epic Systems Corp., which upheld mandatory arbitration provisions for workplace claims.

Plaintiffs’ class action lawyers regularly challenge arbitration clauses with class action waivers; they regard them as a huge impediment to their ability to vindicate worker rights, including claims asserted by workers who allege they are employees misclassified as independent contractors.  In contrast, businesses using arbitration agreements view them as a means to curtail the misuse of class actions used to exact costly settlements in circumstances where only a few members of the class truly feel aggrieved.

The effort by the plaintiff in the New Prime case was successful, but only because the worker and the company both agreed that Mr. Oliveira was an independent contractor and was engaged in an interstate transportation industry.  That invoked the exclusion in Section 1 of the FAA, which forecloses arbitration under that federal law. If New Prime had instead sought to compel arbitration under a state arbitration law instead of or in addition to the FAA, it might have secured a court order compelling arbitration of the worker’s claims.

Thus, the first practice pointer for lawyers to consider is predicating a motion to compel arbitration on the applicable state arbitration law, if the worker is unquestionably a transportation worker involved in interstate commerce.  If, however, an argument might be advanced by the worker’s counsel that the plaintiff may be excluded under the FAA (or if it is indisputable that the worker is not involved in an interstate transportation industry), a company may wish to base a motion to compel not only on the FAA but also on an applicable state arbitration statute.

Of course, this strategy assumes the arbitration clause in issue is free from other challenges.  As noted in our blog post of November 14, 2018 entitled “How to Effectively Draft Arbitration Clauses With Class Action Waivers in Independent Contractor Agreements,” plaintiffs’ class action lawyers have been very creative in their efforts to undermine efforts by companies to arbitrate cases and limit class actions.

In that blog post, we discussed in detail ten tips to be utilized in appropriate circumstances to minimize challenges to arbitration clauses with class action waivers.  Those suggestions can be summarized as follows:

1. Any arbitration agreement with a class action waiver should specifically recite that the arbitrator is not given authority to conduct class arbitration.

2. Make sure the arbitration clauses can withstand unconscionability arguments.

3. Don’t bury arbitration clauses deep within independent contractor agreements.

4.  Place jury trial waivers in ALL CAPITAL LETTERS, or bold type, or larger size typeface, and state that the arbitration clause means that disputes will not be decided by a court or jury.

5. Avoid selecting a particular state’s law as the parties’ contractual “choice of law” if that state’s law contains an unfavorable test for independent contractor status.

6. Make sure the arbitration clause in an IC agreement specifically designates as third-party beneficiaries all of the clients and customers of the business.

7. Draft a state-of-the-art “delegation” of authority provision. The so-called “delegation” clause confers upon arbitrators the authority to decide certain issues – but as we learned in the New Prime decision, not whether a worker is excluded by Section 1 of the FAA.

8. Keep tabs on changing laws and modify any choice of law provision in IC agreements when there has been an unfavorable change in the independent contractor laws of the state selected as the choice of law.

9. Ensure your arbitration provisions are up to date, taking advantage of the newest legal developments in this area of the law.

10. Keep abreast of new statutes affecting arbitration of independent contractor and wage and hour disputes.

There are dozens of other tips that practitioners should consider to increase the odds of compelling arbitration of class action claims by workers claiming they have been misclassified as 1099ers. But perhaps the most important suggestion is one intended to minimize the likelihood of an IC misclassification lawsuit being brought in the first place: enhance the company’s level of compliance with applicable IC laws.

One way that many companies have enhanced their IC compliance is through a process such as IC Diagnostics™, which evaluates a company’s level of compliance and, to the extent feasible, restructures, re-documents, and re-implements the independent contractor relationship, without altering the company’s business model – all in an effort to minimize independent contractor misclassification exposure by means of a customizable and sustainable solution.

Written by Richard Reibstein

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