Federal Arbitration Act (“FAA”) § 1 (“FAA § 1”) provides that “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1. In New Prime Inc. v. Oliveira, the Supreme Court held that, as of 1925, “contracts of employment” was not a term of art limited to employer-employee relationships, but a capacious phrase referring to agreements “to perform work,” including independent-contractor arrangements. 586 U.S. 105, 113–21 (2019). (Posts discussing FAA § 1, including New Prime, are here, here, here, here, & here.)
In Silva v. Schmidt Baking Distribution, LLC, No. 24-2103-cv, slip op. (2d Cir. Dec. 22, 2025), the U.S. Court of Appeals for the Second Circuit held that distribution agreements signed by single-worker corporate entities—entities the company required delivery drivers to form as a condition of keeping their routes—were “contracts of employment” within FAA § 1, so the FAA could not be used to compel arbitration. See Silva, slip op. at 2, 18–20.
The “transportation worker” exemption continues to generate litigation and businesses have been experimenting with contract structures designed to avoid it. Silva sends a clear signal: courts will favor substance over form when an employer or contractor requires an individual transportation worker to create an entity to act as a contracting party.
Background and Procedural Posture: Silva and FAA § 1
In Silva two Connecticut-based commercial drivers delivered a Maryland-based bakery’s baked goods in Connecticut. They initially worked as W-2 employees of a staffing agency, but after several months the baked-goods distributor required them—as a condition of continued work—to form corporations and sign “Distribution Agreements” as corporate presidents. Each driver, with the assistance of the bakery, formed a corporation for that purpose. They were prohibited from signing the Distribution Agreements in their individual capacity and were required to and did sign in their corporate capacity. The Agreements contained arbitration agreements and class-wide-proceeding waivers.
The drivers asserted that the daily work they did remained the same despite the change. They contended that work “involved driving a commercial truck to [the bakery’s] warehouse to pick up fresh baked goods, delivering the products to retail outlets within their assigned territories, unloading the goods, and stocking them on retail shelves.” Silva, slip op. at 5. The drivers contended “that they ha[d] virtually no role in negotiating any pricing, sales, or promotions with retailers, which are functions carried out by [the bakery].” Silva, slip op. at 5-6.
Disputes arose between each driver and the bakery about whether the bakery violated Connecticut wage and overtime laws. The drivers filed in Connecticut state court a putative wage-and-hour class action. The company removed to federal court, based on diversity jurisdiction, and moved to compel arbitration and stay the litigation under the FAA. The district court granted the motion and certified an interlocutory appeal under 28 U.S.C. § 1292(b) (ordinarily the Second Circuit would not—prior to the district court rendering a final decision— have jurisdiction to hear an appeal from an order granting a motion to compel arbitration and stay litigation, see 9 U.S.C. §§ 16(b)(2), 16(a)(1) & (3); 28 U.S.C. § 1292(b)).
FAA § 1 Issue Presented
A three-judge panel of the Second Circuit accepted the district court’s § 1292(b) certification “and directed the parties ‘to address whether an individual worker falls within the scope of the [exception] in § 1 of the Federal Arbitration Act even if the contract to perform work is signed on behalf of the worker by an LLC incorporated by the worker and not the worker as an individual.’” Silva, slip op. at 7 (quoting App’x at 627). The Court held that the workers fell squarely into Section 1’s transportation workers exemption.
Reasoning
The Court concluded that “[t]he record on appeal unequivocally demonstrates that [the driver’s corporations] are mere instrumentalities created at [the bakery’s] behest to dress individual ‘contracts of employment’ in the garb of commercial transactions.” Silva, slip op. at 18 (quoting New Prime, 586 U.S. at 116). The Court therefore held the agreements were “contracts of employment” and vacated the order compelling arbitration. Silva, slip op. at 2, 18–20.
The Court’s analysis started with, and leaned heavily on, New Prime, principally for the proposition that “contracts of employment” within the meaning of Section 1 are not limited to ordinary employment agreements—which establish an employer-employee relationship—but also include agreements “for the performance of work by workers.” New Prime, 586 U.S. at 116 (emphasis in original).
The Court explained that “New Prime’s holding that ‘contract of employment’ was not, in 1925, ‘a term of art bearing some specialized meaning,’” but instead a capacious phrase “referring to ‘nothing more than an agreement to perform work leaves little room to exclude a contract from the § 1 exception solely because it is between businesses.’” Silva, slip op. at 12 (quoting New Prime, 586 U.S. at 114). The Court reinforced this reading by pointing to contemporaneous decisions using the term “‘contracts of employment’ to describe work agreements among corporations, partnerships, and labor unions.” Silva, slip op. at 12.
The statute’s text, the Court added, confirms the point: Congress used “the phrase ‘contracts of employment of workers,’ not ‘contracts of employment with workers.’” Silva, slip op. at 13 (emphasis in original). If Congress had “intended to omit contracts between business entities from § 1, it could have said so.” Id.
The bakery nevertheless invoked the U.S. Supreme Court’s admonition in Circuit City that the § 1 exemption should be narrowly construed. Silva, slip op. at 13 (quoting Circuit City, Inc. v. Adams, 532 U.S. 105, 118 (2001)). The Second Circuit explained that Circuit City announced the “narrow construction” principle while rejecting an effort to read “engaged in commerce” so broadly that the transportation workers exception would, contrary to its text, be construed to encompass all workers engaged in interstate commerce, not simply transportation workers. The concern that prompted Circuit City to construe Section 1 narrowly thus had no bearing on whether the transportation exemption applies when the worker contracts in an individual versus a corporate capacity. See Silva, slip op. at 13-15 (citing Oliveira v. New Prime, Inc., 857 F.3d 7, 22-23 (1st Cir. 2017), aff’d, 586 U.S. 105 (2019)).
The Court likewise rejected the bakery’s attempt to analogize the Distribution Agreements to ordinary supplier-distributor or franchise arrangements, noting that § 1’s text contains no such carveout. Silva, slip op. at 15–16. Citing and quoting Adler v. Gruma Corp., 135 F.4th 55, 69 (3d Cir. 2025), the Court observed that even a franchise agreement may qualify as a “contract of employment” where “the agreement itself ‘and undisputed facts show[ed] Plaintiffs contracted with Defendant to “perform work” by distributing Defendant’s food products.’” Silva, slip op. at 15-16 (quoting Adler,135 F.4th at 69).
Methodologically, the Second Circuit described its approach as a preference for substance over form, drawing an analogy to corporate veil-piercing doctrine—while emphasizing it was not suggesting the drivers’ corporate forms were shams or alter egos. Silva, slip op. at 16 & n.7.
The Court treated “worker-focused” substance as its guidepost, not the form of the agreement, which merely changed contractual relationship from one between the driver and the bakery into one between the bakery and a corporate entity for whom the driver was the sole agent and under which the driver performed the same work as before. The drivers’ “roles remained unchanged” despite the new corporate, contractual wrapper over the parties’ relationship. Silva, slip op. at 5-6, 18.
The facts showed that each driver performed transportation work on an individualized basis as independent contractors, albeit through what were essentially shell companies.
The drivers were also effectively denied the one benefit they might have obtained by incorporating. The Court pointed to a “personal guarantee” provision requiring the individual driver to guarantee the corporation’s obligations, stating that it was evidence that Schmidt was contracting for the driver’s labor, not for that of a freestanding business corporation. Silva, slip op. at 17.
“This” indemnity “provision [was] not limited to financial liabilities[,]” said the Court, but “extend[ed] to the performance of the work itself. . . .” It therefore “blurs the line between a supposedly business-to-business contract and an agreement for personal services.” Silva, slip op. at 17. It was, the Court concluded, “[s]ome of the most telling evidence that these [Distribution Agreements] are employment contracts. . . .” Silva, slip op. at 17.
A Limiting Principle: A Business-to-Business Contract for Transportation Services May Fall Outside the FAA § 1 Transportation Workers Exemption
The Second Circuit stressed a limiting principle: “not all business-to-business contracts involving transportation work fall within the exception.” Silva, slip op. at 18. “Contracts for transportation work between sizeable business entities with many employees” may fall outside FAA § 1, even if transportation work is involved. Id.
Distinguishing Fli-Lo and Amos: Size and Separateness versus “Hobson’s Choice”
The Second Circuit sought to align its holding with outcomes in other circuits (including the Ninth Circuit) that have refused to extend FAA § 1 to agreements between larger, corporate transportation service providers that employ many workers and run multiple routes. See Fli-Lo Falcon, LLC v. Amazon.com, Inc., 97 F.4th 1190 (9th Cir. 2024); Amos v. Amazon Logistics, Inc., 74 F.4th 591 (4th Cir. 2023). The agreements in those cases, the Second Circuit explained, were not “contract[s] of employment” within the meaning of the transportation workers exemption. Silva, slip op. at 19-20.
The Second Circuit explained that in Fli-Lo, plaintiffs were corporations with “‘tens or hundreds of employees’ and managed multiple delivery routes for Amazon.” Silva, slip op. at 18-19. The Ninth Circuit held that commercial contracts like that are not contracts of employment of transportation workers. Silva, slip op. at 19 (citing quoting Fli-Lo Falcon, 97 F.4th at 1196).
Likewise, explained the Court, in Amos, the plaintiff corporation ultimately employed roughly 450 drivers. The Fourth Circuit refused to treat that “sizeable corporate entit[y] as similar in nature to the actual human workers enumerated by the text of the transportation worker exemption . . . .” Silva, slip op. at 19 (citations and quotations omitted).
Here, by contrast, the drivers were individual workers who did not “form sizeable logistics companies that employ[ed] significant workforces[; t]hey [were] individual transportation workers who were required to incorporate to perform the same transportation services they had been performing as individuals.” Silva, slip op. at 20 (footnote omitted). The drivers faced “a Hobson’s choice”: either incorporate in the manner prescribed by the bakery or “los[e] their jobs.” Silva, slip op. at 20. “This distinction[,]” said the Court, “is dispositive and aligns our holding with the precedent from our sister circuits.” Silva, slip op. at 20.
A Broader Anti-Circumvention Principle
The Court explained that it would not “allow employers to circumvent Congress’s exception … by requiring those workers to take the corporate form.” Silva, slip op. at 20. That is the opinion’s real bite: it can be deployed against other “reclassification” strategies that are aimed at routing transportation-worker disputes into FAA arbitration despite Section 1 text to the contrary. See Silva, slip op. at 16-17, 20.
Some Silva FAA § 1 Takeaways
Here are some general observations for all parties and counsel:
- FAA § 1 analysis can be fact-intensive and structure-sensitive.
- Not all business-to-business transportation contracts fall within § 1; the “size and separateness” of the contracting entity may matter. See Silva, slip op. at 18.
- Courts may treat single-worker entities as non-dispositive where the entity is effectively an employer-required conduit for a human worker’s labor.
- The Second Circuit has explicitly adopted an “anti-circumvention” stance.
For business entities drafting and structuring transportation service relationships:
- If the business model genuinely relies on separate business entities to provide transportation services (e.g., multi-employee Delivery Service Providers (“DSPs”), route operators, etc.), discuss with your attorney building a record that shows real separateness and independence: e., through workforce scale, operational control, route management, multiple customers, and capital investment.
- If you are requiring individual drivers to incorporate as a condition of continuing the same work, expect courts to make the kind of substance over form arguments the Court made in Silva. The Court’s opinion arms plaintiffs with a strong “anti-circumvention” framing.
For plaintiffs and their counsel seeking to invoke FAA § 1:
- Counsel should consider building the “instrumentality” record early: who required incorporation, who paid for filings, who controlled routes, who set pricing, whether duties changed (or didn’t) after the paper switch.
- Counsel should anticipate the defense’s “business-to-business contract” argument by showing the entity is single-worker, single-customer, single-route, and was required for the worker to keep the job.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration, and trial court and appellate arbitration-related litigation. A former BigLaw partner, he has 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.
This blog features links to several arbitration-related videos and webinars in which Mr. Loree appears.
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Tags: anti-circumvention, Arbitration Clause, business-to-business contracts, Circuit City, class waiver, Contracts of Employment, distribution agreements, FAA § 1, incorporated drivers, Independent Contractor, motion to compel, New Prime, statutory interpretation, transportation workers
