Generally, once parties sign a contract with an arbitration provision, disputes arising out of the contract are required to be heard by an objective arbitrator. After Congress passed the Federal Arbitration Act (FAA) in 1925, the long-established federal policy has been to liberally favor arbitration agreements.

Prior to the FAA, however, there was no guarantee that a court would honor a party’s agreement to arbitrate. Now, the FAA requires courts to compel parties to arbitrate according to the terms in their agreement. Although the FAA provides the court with broad authority to enforce and compel arbitration, the Act is not without its limits.

Included in section one of the FAA is a narrow exception for certain types of contracts: the FAA does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” This is often referred to as the FAA’s “transportation workers exception.” When this exception applies, the court is without authority to compel a party to arbitrate. If the court has no authority to compel a party to arbitrate, then regardless of the arbitration agreement, a party may bring the dispute in court.

Recently, in New Prime, Inc. v. Oliveria, the Supreme Court unanimously held that the transportation workers exception applies not only to transportation employees, but also to independent contractors in those same categories of work. The plaintiff, Dominic Oliveria, worked as a truck driver for New Prime, Inc. After a dispute arose concerning the wages paid to truck drivers, Mr. Oliveria brought a class action lawsuit in federal court.

In response, New Prime argued that Mr. Oliveria’s contract included an arbitration agreement. New Prime asked the court to use its authority under the FAA to force Mr. Oliveria to arbitrate the dispute according to the terms in the contract. Mr. Oliveria argued that the court had no authority to compel arbitration because the transportation workers exception applied.  New Prime maintained that the court had authority because Mr. Oliveria was an independent contractor and not an employee; therefore, the transportation workers exception did not apply. Both the District Court and the First Circuit agreed with Mr. Oliveria that the exception applied.

Likewise, the Supreme Court held that the transportation workers exception applied. The court performed a detailed analysis to determine what the term “contract for employment” meant in 1925, when the FAA was passed. Even though the court recognized that the distinction between employees and independent contractors existed in 1925, it concluded that the phrase, “contracts for employment” meant any contract for “work.” Accordingly, the court held that the exception applied to both employees and independent contractors and the FAA did not apply.

This decision will likely have significant ramifications for transportation industry companies that have arbitration agreements with their independent contractors. Without the confidence of the FAA, transportation companies will have to rely on other legal authority to enforce arbitration provisions. The lawyers at Vandeventer Black LLP are available to assist you regarding all aspects of contractual advice, including drafting enforceable arbitration agreements. For additional information, please contact the authoring attorney.