Avoiding surprise, employers should consider the First Circuit’s analysis

This article, written by attorneys Aaron Rosenberg and Cassie Rodgers, was originally published by seacoastonline.com and can be found here.

Employers, especially those with a workforce spanning multiple states, should take note of a recent First Circuit decision highlighting the increasing likelihood that arbitration clauses and related class action waivers may be subject to challenge in our ever-expanding world of interstate commerce.

In Fraga v. Premium Retail Servs., 61 F.4th 228 (1st Cir. 2023), the Court considered whether an employee had plausibly alleged that she fell within the exemption to the Federal Arbitration Act that applies to workers “engaged in . . . interstate commerce.”  The First Circuit adopted a relatively broad understanding of what constitutes engaging in interstate commerce—holding that the FAA would not apply if an employee frequently transported materials shipped to his or her home in furtherance of the employer’s contractual obligations.  This holding extends to materials as innocuous as coupons and advertising signage.

Especially considering the increased prevalence of remote work, this case should raise the eyebrow of businesses and their counsel.  Employers may find arbitration clauses in their employment contracts less reliable if their worker’s role arguably involves furthering transport of goods that have been passed between states.

In order to avoid a surprise result, employers should consider the First Circuit’s analysis.  In Fraga, the court applied the Supreme Court’s recently-explained two-part test for determining whether a worker is engaged in interstate commerce, implicating the FAA exclusion, which requires: (1) defining the “class of workers” that the relevant employee belongs to; and (2) determining whether that class of workers is engaged in interstate commerce.

As to the first prong, the First Circuit explained that the relevant “class of workers” depends in part on what each particular employee actually does in his or her role and the frequency with which those acts are performed.  However, the court also foreshadowed in dicta the potential for a broader interpretation of this exception from the FAA—observing that it has not yet considered a case in which “a task might be performed rarely, yet its performance is the central purpose of the job.”

On the second prong, the First Circuit focused on workers who may not be directly involved in interstate transport themselves, but serve roles “so closely related to interstate transportation as to be practically a part of it.”  As part of this analysis, the court looked to the employer’s service agreement with third parties and what role particular employees play in connection with that agreement.  This analysis also suggests a fairly broad understanding of the types of workers that may fit into the Section 1 exemption, at least in the First Circuit.

As the Fraga case shows, employers and their counsel should be mindful of the FAA’s Section 1 exemption, and the courts’ developing understanding of its meaning, when drafting employment agreements for workers that could arguably be engaged in interstate commerce. Although the FAA is generally broad and favors enforcement of arbitration agreements, challenges to such agreements may be more likely than employers currently anticipate, and under certain circumstances may find a more sympathetic judicial ear than expected.