US Supreme Court Invalidates Trucking Company’s Arbitration Clause

by G. Spencer Mynko, Esq.

New Prime Inc. Can’t Force ICs Into Arbitration

U.S. Supreme Court Unanimously Rules in Favor of Independent Contractor Truck Driver, Holding Trucking Company’s Arbitration Agreement is Exempt From Federal Arbitration Act.

Supreme Court Sides with O-O Truck Driver in Arbitration Dispute, but the decision does not affect IC classification.

On January 15, the United States Supreme Court ruled that a trucking company cannot compel arbitration in a wage dispute brought by an independent contractor truck driver. Generally speaking, employers can insist upon arbitration agreements in contracts with subcontractors. However, The US Supreme Court has decided that an exception to the Federal Arbitration Act (FAA) applies to independent contractor truck drivers.

In this particular case, the truck driver brought a class action lawsuit against New Prime Trucking company, asserting that independent contractor drivers were misclassified and therefore were entitled to benefits due an employee driver. Despite the fact that the driver had signed an arbitration agreement with the trucking company, he claimed that the FAA’s exception applied to independent contractors as well as employees. Notably, the decision did not touch on whether the driver was properly classified as an independent contractor (New Prime and the driver agreed to stipulate that, for purposes of argument in front of the high court, he was properly classified.)

History of the FAA

The FAA was enacted in 1925 to provide arbitration as an alternative to litigation. For almost a century, trucking companies likely viewed an arbitration agreement with a contractor to not be a “contract of employment”. However, the United States Supreme Court turned that interpretation on its head by stating that “contracts for employment” included all agreements to perform work regardless of whether the work is being done by a properly classified independent contractor.

Part of the reason this is so astonishing, is because this is the first time in over a decade that the US Supreme Court has rejected a claim seeking to enforce an arbitration agreement.

Implications of the Decision

This decision will have a significant impact on the trucking industry which relies heavily upon independent contractors and arbitration to efficiently resolve individual disputes. However, while the ruling seems to make efforts to enforce arbitration agreements with IC/owner-operators more difficult under the FAA, it does not limit motor carriers abilities to have those agreements enforced under state arbitration law. Again, while it may make it harder for motor carriers and independent owner operators to rely on agreements to resolve a dispute through arbitration, the court did not specifically address whether an owner operator who did not personally perform services or who is operating multiple trucks (i.e. a trucking company) would be subject to the exemption. Because this was not addressed in the decision, this does open the door for future litigation. In other words, while it may be now impossible to force individual independent contractor truck drivers to arbitrate disputes under the FAA, when the contract is between two companies, as opposed to a company and an individual, the arbitration agreement may still be enforceable under federal rules. Likewise, parties need not contractually agree that FAA rules apply, and instead may resort to state law. While this decision will make it more difficult for companies to enforce arbitration agreements, it doesn’t close the door and trucking companies will need to urgently reevaluate their arbitration agreements.

Arbitration agreements may still be an option for contracts with carriers that are not a one-man/one-truck driving operation. During the oral argument, several justices probed whether an owner-operator who did not personally perform services or who operated multiple trucks would be subject to the exemption. The court did not address these issues in its opinion, arguably leaving them open for future litigation.

Notably, for the FAA exclusion to apply, the driver must be engaged in interstate commerce. If a driver works solely in one state, the exception will not apply.
Also, in contrast to the FAA, state arbitration laws generally do not exempt transportation workers involved in interstate commerce from arbitration. Therefore, if a company seeks to compel arbitration under state arbitration law, it is likely that the arbitration clause will be enforceable.

What exactly did the court say?

The first issue addressed by the court was whether a court or an arbitrator can decide whether an independent contractor is excluded from the provisions of the FAA. In this case, the United States Supreme Court concluded that the courts, and not an arbitrator, must decide whether or not to compel arbitration under the FAA. The court specifically stated that the parties could not, by agreement alone, bypass the interstate transportation worker exclusion of the FAA.

The second issue the court dealt with was weather “contracts of employment” covers contracts between trucking companies and independent contractors. Again, the court ruled that the exemption applies to independent contractors as well.

What is a trucking company to do?

First and foremost, trucking companies need to ensure that their arbitration provisions are up to date. Trucking companies need to work with lawyers who keep tabs on changing laws and make certain that their arbitration agreements address the seemingly continual evolution of the law affecting arbitration agreements.

Furthermore, arbitration agreements should specifically include a class-action waiver which states that the arbitrator does not have authority to conduct class arbitration.

The arbitration agreements need to be fair and placed prominently in the contract. The legal term lawyers use is “unconscionable”. Arbitration agreements must not be unconscionable. While that is a legal term of art, an experienced attorney can advise you on how to avoid allegations of unconscionability, so that the arbitration agreement is not unconscionable.  The arbitration agreement should clearly state that disputes will not be decided by a jury.

The choice of law clause is now critical, in light of the United States Supreme Court’s decision in New Prime.

The arbitration provision should make it clear that a trucking companies customers and clients are covered under the arbitration agreement.