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FAA ‘transportation-worker’ contract exemption applied to independent contractor agreement; arbitration not compelled

By Kathleen Kapusta, J.D. and Lisa Milam-Perez, J.D.

In a case raising two questions of first impression before it, the First Circuit held that when confronted with a motion to compel arbitration under Section 4 of the Federal Arbitration Act, the district court—and not the arbitrator—must decide whether the FAA’s Section 1 exemption, which exempts contracts of employment of transportation workers from the Act’s coverage, applies. The court also held that transportation-worker agreements establishing or purporting to establish independent contractor relationships are “contracts of employment” within the meaning of the exemption. Because the contract in this case between a truck driver and New Prime, Inc., was within the exemption, the FAA did not apply, and the court thus lacked jurisdiction. Accordingly, it affirmed the lower court’s denial of Prime’s motion to compel arbitration of the truck driver’s claims against it and dismissed the appeal (Oliveira v. New Prime, Inc., May 12, 2017, Thompson, O.).

Apprenticeship training. The plaintiff entered a “Paid Apprenticeship” training program with New Prime in March 2013. Apprentices who have obtained a Missouri Commercial Driver’s License (CDL) permit shadow company drivers and drive 10,000 miles under supervision. The only remuneration received is an advance of $200 per week, which is subtracted from future earnings. After on-the-road training, apprentices take a CDL exam and work as “B2″ driver trainees for 30,000 miles, earning 14 cents per mile. The company also regularly deducts money from paychecks, resulting in a final pay of about $4/hour while driving. Thereafter, drivers are classified as either company drivers or independent contractors.

Independent contractor agreement. Telling him he could earn more as an independent contractor, Prime sent the plaintiff to an accounting company in the same building, which created an LLC for him and sent him to a closely related corporation to select a truck to lease. He was given documents to sign, including an “Independent Contractor Operating Agreement,” which also had an arbitration clause providing that any disputes as to the rights and obligations of the parties, including the arbitrability of disputes, would be fully resolved by arbitration.

Frustrated and believing he was unlawfully underpaid, the plaintiff stopped driving for Prime. The separation was short-lived, however, as Prime rehired him a month later, this time as a company driver. Believing that his duties were substantially the same to those he had as an independent contractor and that his pay was as paltry as ever, he brought a class action against Prime, alleging that it violated the FLSA and the state’s minimum wage statute. He also asserted a class claim for breach of contract or unjust enrichment, as well as several individual claims for violation of state labor laws.

Lower court proceedings. In response, Prime move to compel arbitration under the FAA. Denying the motion, the district court concluded that the question of the applicability of the Section 1 exemption was for the court, and not an arbitrator, to decide. It also determined that it could not yet answer that question because the “contracts of employment” language of the exemption does not extend to independent contractors—and discovery was needed on whether the plaintiff was a Prime employee or an independent contractor.

Who decides? The question of whether the district court or the arbitrator decides the applicability of the exemption was one of first impression in the circuit, observed the court, noting that the parties championed dueling out-of-circuit precedent on this issue. While Prime relied on the Eighth Circuit’s opinion in Green v. SuperShuttle International, Inc., which found that “[a]pplication of the FAA’s transportation worker exemption is a threshold question of arbitrability” in the parties’ dispute, the court here was persuaded by the Ninth Circuit’s decision in In re Van Dusen, which found that the question of the court’s authority to act under the FAA is an “antecedent” determination for the district court to make before it can compel arbitration under the Act.

The court does. When the only basis for seeking arbitration in federal court is the FAA, the district court can grant the requested relief only if it has authority to act under the FAA, the appeals court explained, noting that if the FAA does not apply, “private contracting parties cannot, through the insertion of a delegation clause, confer authority upon a district court [i.e., to compel arbitration under the FAA] that Congress chose to withhold.” Therefore, the district court must make an antecedent determination that a contact is arbitrable under Section 1 before ordering arbitration pursuant to FAA, Section 4. Accordingly, the court joined its colleagues on the Ninth Circuit, holding that the question of whether the Section 1 exemption applies is an antecedent determination that must be made by the district court before arbitration can be compelled under the FAA.

Independent contractors. As to whether an agreement between a trucking company and an individual transportation worker cannot be a “contract of employment” within the meaning of Section 1 if it establishes (or attempts to establish) an independent contractor relationship, Prime argued that the weight of district court authority to consider the issue has concluded that the exemption does not extend to such contracts. But, said the court, interpreting a federal statute is not simply a numbers game. Unpersuaded by the district courts’ treatment of this issue, the First Circuit found that the fatal flaw in the authority upon which Prime relied was the failure to closely examine the text of the FAA.

Contracts of employment. Noting that Congress did not provide a definition for the phrase “contracts of employment” in the FAA, the court gave it its ordinary meaning at the time the statute was enacted in 1925, determining that the phrase means simply “agreements to do work.” In sum, said the court, the combination of the ordinary meaning of the phrase “contracts of employment” and Prime’s concession that the plaintiff was a transportation worker compelled the conclusion that the contract in this case was excluded from the FAA’s reach. “Because the contract is an agreement to perform work of a transportation worker, it is exempt from the FAA,” said the court, declining “to follow the lead of those courts that have simply assumed that contracts that establish or purport to establish independent contractor relationships are not “contracts of employment” within the meaning of § 1.”

Nor was the court persuaded by the two justifications that some district court decisions put forward to support the conclusion that the exemption does not apply to contracts that establish or purport to establish independent-contractor relationships—that such an interpretation is consistent with the need to narrowly construe Section 1 and the liberal federal policy favoring arbitration. “In our view, neither consideration warrants retreat from the ordinary meaning of the statutory text,” it concluded.

Finally, the court emphasized that its holding was limited: It applies only when arbitration is sought under the FAA, and it has no impact on other avenues (such as state law) by which a party may compel arbitration.

Dissent. While applauding the majority’s “impressive job of marshalling the arguments in support of its interpretation” of Section 1, as well as its finding that transportation-worker agreements purporting to establish independent contractor relationships are exempt from the FAA’s reach, Judge Barbadoro dissented in part, thinking it wise to refrain from addressing the question at all. The scope of the Section 1 exemption was before the circuit court on what was essentially an interlocutory appeal, he noted, since the district court didn’t reach a final judgment on the matter. Better for the lower court to consider the issue in the first instance, said Barbadoro (himself a district court judge, sitting by designation) with the benefit of a well-developed factual record and full briefing on the question.

Remand instead. Instead, he would have remanded the Section 1 exemption question for discovery to proceed. The lower court might well have found the “nominally” independent contractor agreements at issue here did in fact create an employment relationship. “In that circumstance, neither we nor the district court would have any occasion to categorically decide whether all transportation-worker agreements purporting to create independent-contractor relationships qualify for the § 1 exemption,” he noted.

Contract of employment? There were more reasons for the First Circuit to have shown restraint, according to Barbadoro—most significantly, because whether “contracts of employment” include all transportation-worker agreements “presents a challenging question of statutory interpretation,” and there is little guidance to be found in the text of the statute. Also, most courts to have addressed independent contractor agreements in the Section 1 context have held the exemption does not apply, “and no other court has engaged in the kind of detailed analysis of ordinary meaning that characterizes the majority’s opinion.” That leaves the First Circuit without either a corroborating analysis to guide it, or a contrary opinion as a counterbalance. Also, the question requires courts to wade into “the fact-bound, and notoriously precarious, field of employment-status determinations.” While the categorical rule announced by the majority here will eliminate the need for such fact-finding on employee status, “it could also lead to the over- and under-inclusiveness concerns typical of such rules.”

Incomplete record. Moreover, all of this was without the aid of a well-developed factual record, he added, given the dearth of briefing on the ordinary meaning of “contracts of employment.” The plaintiff offered a “less-than-robust” argument in asserting he was a statutory employee—having cited just two sources on the question since the FAA’s adoption in 1925—and the defense simply wouldn’t address the issue head on, insisting it was a matter for the arbitrator. Consequently, the appeals court deliberated with only a one-sided view of the “contract of employment” issue. That should leave the court wary to tackle the question, particularly when it rules against the party with the less-developed argument, he urged.

Likewise, the factual record amounted to the plaintiff’s unanswered complaint and some documents accompanying the parties’ motions. Caution would weigh against denying relief to a defendant based largely on “the plaintiff’s untested allegations.” The best option under these circumstances, in Barbadoro’s view, was to follow “the more cautious path” of remand.