Independent Contractor

May a Trucker and its Drivers Contract Around Section 1 of the Federal Arbitration Act?

John C. Lane

The Supreme Court in New Prime v. Oliveria ruled a truck driver’s employment dispute – even that of an independent contractor – may not be ordered to arbitration under the Federal Arbitration Act. FAA § 1 exempts such contracts from the provisions of the Act. But can the parties agree in their arbitration provision to contract around Section 1? The Ninth Circuit says they may not. The story of its August 19th decision in Romero v. Watkins & Shepard Trucking and the Court’s reasoning are worth a look.

Alejandro Romero worked as a truck driver for Watkins from 1997 to 2019, making intrastate deliveries within California of goods that “had once crossed state lines,” facts essential to the Court’s conclusion that he was engaged in interstate commerce for purposes of FAA § 1. His employment contract contained an arbitration agreement calling for arbitration under the FAA and expressly contracting out of the application of Section 1’s exemption. That contract provision is at the center of the Court’s opinion.

In August 2019 Watkins announced it would cease operations and informed Romero and fellow workers that they would be laid off. Romero was terminated effective August 23, 2019. He filed a putative class action against Watkins in state court alleging violations of the California and federal WARN acts, for failing to give sufficient notice of the cessation of business. Watkins removed the case to federal court and moved to compel arbitration. Of interest here, Watkins argued that the exemption was inapplicable because Romero’s work was entirely intrastate.

The district court ruled that because Romero made intrastate deliveries of goods that had previously crossed state lines, he was engaged in interstate commerce, within the meaning of FAA § 1 exemption. The Ninth Circuit affirmed, citing its 2020 decision in Rittman v. Amazon and ruling that parties to an arbitration agreement may not “contract around the FAA’s transportation worker exemption.”

In the end, however, arbitration was ordered in a companion decision, because the arbitration agreement also invoked the law of Nevada in the event the federal act was held inapplicable. Nevada has no transportation-worker exemption similar to FAA § 1. The Ninth Circuit affirmed the district court’s order to compel arbitration under Nevada law.

LEGISLATIVE UPDATE: Independent Contractor v. Employee

The Lane Law Letter

NJ: Proposed Legislation

NJ State House

It was all but certain to pass. New Jersey Governor Phil Murphy was waiting to sign it. Television ads proclaimed its virtues. But the State’s anti-independent contractor bill (similar to California’s AB5) was pulled from the last legislative session. Groups representing independent contractors in myriad occupations made forceful and practical arguments against the bill. Included were freelance writers, musicians, doctors, various independent teachers, truckers, graphic designers, bakers, and others. Many legitimate independent contractor businesspeople prefer the freedom of owning and operating their own businesses. They do not want to be artificially classified as employees, a move they say would harm their businesses. The legislation was re-introduced on January 14th, and referred to the Labor Committees of both the Senate and Assembly. We are watching developments in both New Jersey and New York, which is also considering similar legislation.

CA: Preliminary Injunction Granted

Much to the relief of many, on January 16th, Judge Benitez granted a preliminary injunction to the California Trucking Association, temporarily stopping the enforcement of AB5 upon motor carriers. In his decision, Judge Benitez writes, “…there is little question that the State of California has encroached on Congress’ territory by eliminating motor carriers’ choice to use independent contractor drivers, a choice at the very heart of interstate trucking. In so doing, California disregards Congress’ intent to deregulate interstate trucking, instead adopting a law that produces the patchwork of state regulations Congress sought to prevent. With AB-5, California runs off the road and into the preemption ditch of the FAAAA.”

CA Federal Court Restrains Enforcement of “ABC Test” for Motor Carriers

John C. Lane
Edward J. Schwartz United States Courthouse

A federal district court in southern California issued a temporary restraining order on New Year’s Eve barring the enforcement of the state’s Assembly Bill 5, set to go into effect on New Year’s Day. AB 5 adopted the “ABC test” to determine if a particular worker is an independent contractor or an employee. The test hits particularly hard on the motor carrier industry, because many trucking companies use legitimate independent contractors – owner-operators – as part of their business model. The court’s decision was compelled largely because under the Federal Aviation Administration Authorization Act (“FAAAA”), states are not to enact or enforce their own laws related to a price, route, or service of any motor carrier regarding transportation of property. The TRO applies only to the motor carrier industry.

The ABC test presumes that a worker is an employee, not an independent contractor. The hiring party can rebut that presumption only if it can establish each of three factors:

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