The Second Circuit recently held that delivery drivers who were required to incorporate and contract through single‑employee corporations remained “transportation workers” operating under “contracts of employment” for purposes of the Federal Arbitration Act (FAA). As a result, the FAA’s Section 1 transportation worker exemption applied, and the defendants could not compel arbitration. Silva v. Schmidt Baking Distribution, LLC, 162 F.4th 354 (2d Cir. 2025).
Initially, the drivers delivered baked goods as W-2 employees of a staffing agency that assigned the drivers to Schmidt Baking Distribution. After several months, Schmidt informed the drivers they could only continue delivering if they formed corporate entities and signed distribution agreements on behalf of those entities. The drivers each formed a corporation and executed the distribution agreements which expressly disclaimed any employment relationship, characterized the drivers as independent contractors, and included mandatory arbitration clauses with class action waivers. The drivers’ day-to-day work did not materially change after incorporation. The drivers later brought a putative class action alleging violations of Connecticut’s wage and overtime laws. Schmidt removed the case to federal court and moved to compel arbitration. The district court granted the motion to compel arbitration but granted the drivers’ request to pursue an interlocutory appeal.
The Second Circuit held that the district court erred in granting the motion to compel arbitration. On appeal, Schmidt argued that the FAA’s narrow exclusions do not include the distribution agreements between Schmidt and the drivers. The Second Circuit disagreed, reasoning that the phrase “contracts of employment,” as used in the FAA, broadly refers to any agreement for the performance of work by workers, regardless of whether it reflects a formal employer-employee relationship. The court rejected the argument that incorporation alone removes a contract from the FAA’s exceptions and instead evaluated the substantive relationship between the drivers and Schmidt, including the personal performance of the drivers, the mandatory incorporation as a precondition of work, personal guarantee provisions, and lack of control over pricing, customer relationships, or business strategy. The Second Circuit concluded that each of these considerations weighed in favor of the drivers and against Schmidt’s efforts to compel arbitration.