Does the Federal Arbitration Act Exception Apply to Your Employees?

The Federal Arbitration Act (“FAA”), long a thorn in the side of employees who desire litigation, has now been limited by the expansion of its prominent exception. Before considering the expansion of the FAA’s exception, it is important to understand the FAA.

Scope of the Federal Arbitration Act

The FAA requires enforcement of arbitration agreements and is codified as 9 U.S.C. § 1, et seq.  The FAA, recognized by the United States Supreme Court as “a national policy favoring arbitration,” sought to place arbitration on equal footing with other judicial resolutions. Although the FAA has found success in this respect, the scope of the FAA’s reach is not unlimited and, in fact, has long been a subject of dispute across the nation.

The FAA applies when parties agree to arbitrate disputes regardless of whether the FAA is expressly mentioned in such an agreement. Part of the FAA, frequently referred to as the “residual clause,” provides that it does not apply to employment contracts involving “seamen,” “railroad employees,” or “any other class of workers engaged in foreign or interstate commerce.” Although comprehensive, the FAA’s vague language has raised more questions than answers. In particular, what types of workers are engaged in foreign or interstate commerce?

Applicability of the Federal Arbitration Act Exception

Over the years, this exception has been widely litigated amongst parties seeking to delineate the scope of this definition. For example, the United States Supreme Court found that the FAA’s exception applied to truck drivers operating as independent contractors and accordingly, the FAA did not apply to their contracts. A lower court found that the exemption applied to “last mile” delivery drivers, even though they typically do not cross state lines. And in 1995, the United States Supreme Court ruled that the phrase “involving commerce” should be interpreted broadly. Indeed, Massachusetts is not immune from such inquiries regarding the FAA.

Expansion of the Federal Arbitration Act Exception

Most recently, a Massachusetts lower court found that the residual clause of the FAA applied to “merchandisers,” thereby exempting the plaintiff from the FAA’s applicability. Former employee Sarah Fraga filed suit against her former employer for violations of the Fair Labor Standards Act and the Massachusetts Minimum Fair Wage Law regarding overtime, timely wage payment, and minimum wage. Fraga was employed as a merchandiser, visiting retailers in and around Massachusetts daily. The Court determined that the residual clause should be interpreted to include those “so closely related to interstate transportation as to be practically a part of it,” thus revealing a categorical analysis of those that should be exempt from the FAA:

• Workers who carried goods across state lines;
• Workers who transported goods or passengers that were moving interstate; and
• Those “in positions so closely related to interstate transportation as to be practically a part of it.”

The Court, in finding that Fraga’s work is “so closely related to interstate transportation” as to warrant coverage by the FAA’s exemption, reasoned that a core part of a merchandiser’s job is to receive and transport interstate goods.

Although this decision appears to be an extension of prior holdings, it is not free from criticism. Massachusetts attorneys are concerned with the precedent of such a ruling where interstate transportation does not appear to be the crux of a plaintiff’s job – and where the question of whether workers may enforce their rights is decided by the types of goods that are being delivered. In this respect, the Fraga decision appears to open more possibilities to various types of workers that seek refuge in the residual clause and will inevitably lead to more litigation.

If you need to know whether the FAA exception applies to your employees, contact the attorneys at Rudolph Friedmann at (617) 723-7700.