The Court rules that it is for a court to decide whether the FAA’s Section 1 “contract of employment” exemption applies, regardless of the presence of a delegation provision in an arbitration clause, and that the exemption covers all classifications of workers.

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New Prime Inc. v. Oliveira, 586 U.S._(2019)(slip opinion)
 

Relevant Facts: A truck driver sued for wage and hour violations. The employer invoked an arbitration clause containing a delegation provision in the employment contract. The driver argued that truck drivers fall within the transportation worker exemption in Section 1 of the Federal Arbitration Act (FAA). The employer argued the driver was an independent contractor, so the exemption didn’t apply.

 

Question Before The Court: Whether a dispute over applicability of the FAA’s Section 1 “contract of employment” exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and whether the FAA’s Section 1 exemption is applicable to independent contractor agreements.

 

The Opinion: The Court held that a court should determine whether the Section 1 exception applies, even in cases where an otherwise-valid delegation provision is present. The Court observed that “under the severability principle, [courts] treat a challenge to the validity of an arbitration agreement (or a delegation clause) separately from a challenge to the validity of the entire contract in which it appears,” but “a court may only use Sections 3 and 4 [of the FAA] to enforce a delegation clause if the clause appears in a ‘written provision in . . . a contract evidencing a transaction involving commerce” consistent with Section 2. And only if the contract in which the clause appears doesn’t trigger Section 1’s ‘contract of employment’ exception.”

 

The Court reasoned, “Just as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator. . . . If a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.”

 

This ruling appears to be the first constraint the Court has placed on delegation provisions in arbitration clauses since it first embraced them. In doing so, the Court suggested that where the FAA Section 1 “contract of employment” exception is at issue, a court should first review the contract as a whole to determine whether the exception applies. If the court determines it does apply, then the other sections of the FAA cannot be used to compel arbitration. If the court determines the exception does not apply, then the severability doctrine established in Prima Paint, and later applied to delegation provisions in Rent-A-Center, should be applied, and the court must order arbitration as required under the terms of the arbitration clause.

 

Relying on legislative text and history, the Court also found that the phrase “contract of employment” in Section 1 refers to all contracts to perform work, and is not limited to parties engaged in a formal employer-employee relationship. Under this ruling, the exception applies to independent contractors, and not just to workers classified as employees.

 

With this clarification, one wonders if there is room to expand the type of a work considered to be “engaged in . . . interstate commerce” to include common 21st Century interstate business transactions conducted primarily through the internet. For example, businesses like Amazon and its affiliates are certainly involved in interstate commerce. Under this decision, it is possible that the workers who support those transactions may also be subject to the Section 1 exception. If this question were to arise in a future claim, under this decision, the answer would be for a court to decide.

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