Original Meaning Should Decide Arbitration Act Case on Independent Contractors

Some prefer to achieve their livelihood by being traditional employees, while others prefer to go the individual route and become proprietors and independent contractors. For centuries, the common law has distinguished between those two categories of individuals in order to ensure that independent contractors enjoy both the benefits and burdens of going into business for themselves. To that end, federal and state law has always understood the terms “employee” and “independent contractor” to mean two different things.

Enter the First Circuit Court of Appeals. Section 1 of the Federal Arbitration Act excludes from the Act’s provisions enforcing arbitration clauses those contained in “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Interpreting that language, the First Circuit rejected the view that the term “contracts of employment” includes only (literally) “contracts of employment”—that is, contracts establishing traditional employer-employee relationships. Instead, it said, that FAA excludes any and all “agreements to perform work,” including “agreements of independent contractors to perform work.” That decision is now on appeal to the U.S. Supreme Court in a case called New Prime v. Oliviera.

Cato’s brief shows where the First Circuit went wrong. The Congress that enacted the FAA in 1925 would never have thought it excluded independent contractors. At that time, as today, statutory terms such as “employment” were universally understood to refer to agreements establishing traditional employer-employee relationships according to the principles of common law that evolved over the centuries. Congress knew that because it enacted (and would go on to enact) a series of statutes relying on the common law understanding of terms such as “employment.” Congress also knew and expected that the federal courts would interpret its handiwork in that manner because that is what the courts had repeatedly said that they would do, thereby providing Congress a foundational principle upon which to legislate.

That words such as “employment” referred specifically to traditional employer-employee relationships was not an obscure principle. To the contrary, it was reflected in practically every state workmen’s compensation scheme enacted in early decades of the Twentieth Century. Legislators knew that general provisions addressing traditional employees would never be understood to reach independent contractors. The common understanding of what these terms meant was that clear.

That Congress meant what it said in the FAA is not just a matter of presumption, but of fact. As a historical matter, Congress crafted the Section 1 exemption to avoid unsettling “established or developing statutory dispute resolution schemes covering specific workers.” Those schemes applied only to employees, not to independent contractors. Language and history both confirm that Congress used the term “contracts of employment” for a reason and that it meant what it said, targeting employees, not anyone else.

Because the right to earn a living by structuring one’s economic relations through contract is one of the basic rights that our Constitution was formed to protect, Cato has filed an amicus brief supporting the petitioners in New Prime, Inc. v. Oliveira. Cato seeks to have the Court reverse the erroneous decision below making a hash of Congress’s careful choice of meaningful words and to clarify, as it has many times before, that independent contractors are not employees and statutory terms such as “employee” means precisely what they say.