Substance Over Corporate Form: The Second Circuit Holds that Employer-Imposed Incorporation Cannot Defeat the FAA § 1 Transportation Worker Exemption

I. Introduction

In Silva v. Schmidt Baking Distribution, LLC, No. 24-2103-cv (2d Cir. Dec. 22, 2025), the United States Court of Appeals for the Second Circuit confronted a contemporary variant of an old problem: can an employer use formal legal structures to evade statutory protections for workers?

Two Connecticut commercial truck drivers delivering baked goods for Schmidt Baking were initially engaged as W‑2 employees of a staffing agency. To continue working, they were told they must incorporate and then sign “Distributor Agreements” between Schmidt’s distribution subsidiary and the new corporations they had just formed. Those agreements:

• Disclaimed any employee–employer relationship;
• Labeled the drivers “independent contractors”; and
• Contained mandatory arbitration clauses with class-action waivers.

When the drivers later filed a putative wage-and-hour class action under Connecticut law, Schmidt invoked the Federal Arbitration Act (“FAA”) and moved to compel arbitration. The central question on appeal was narrow but significant:

Does the FAA’s § 1 exemption for “contracts of employment” of transportation workers apply when the contract is formally between the company and a corporation that the individual worker was required to create?

Relying heavily on the Supreme Court’s decision in New Prime Inc. v. Oliveira, 586 U.S. 105 (2019), the Second Circuit answered “yes.” The court held that where the corporate entity is a mere instrumentality through which the parties have contracted “for the performance of work by workers,” the agreement is a “contract of employment” under § 1—even if the worker signs in a corporate capacity. Consequently, the transportation worker exemption applies and the FAA cannot be used to compel arbitration.

This decision closes an emerging loophole by which transportation-sector employers might otherwise have evaded § 1 simply by forcing drivers to operate through one-person corporations or LLCs. At the same time, the court carefully distinguishes contracts with “sizable corporate entities” employing many workers, attempting to stay in harmony with the Fourth, Sixth, and Ninth Circuits.

II. Factual and Procedural Background

A. The Parties and the Work

Plaintiffs–appellants Nathaniel Silva and Phil Rothkugel are commercial truck drivers who resided in Connecticut during the relevant period. Defendants–appellees are Schmidt Baking Company, Inc. (“SBC”), a Maryland manufacturer and marketer of baked goods, and its Maryland distribution subsidiary, Schmidt Baking Distribution, LLC (“SBD”) (collectively “Schmidt”).

In 2020, Silva and Rothkugel began delivering Schmidt’s baked goods as truck drivers:

• They worked through a third-party staffing agency.
• They were classified as W‑2 employees of that agency.
• Their work involved:
  • Driving a commercial truck to Schmidt’s warehouse;
  • Picking up freshly baked products;
  • Delivering them to retail outlets in assigned territories;
  • Unloading and stocking shelves; and
  • Having little to no role in pricing, promotions, or retail negotiations, which Schmidt handled.

After several months, Schmidt informed both men that, to continue working, they would have to:

1. Form corporate entities, and
2. Enter into written “Distribution Agreements” with SBD, executed in their capacities as corporate presidents.

Neither driver had prior experience forming or running a corporation. At Schmidt’s instruction and with its assistance:

• Silva formed “Silva’s Baked Goods”; and
• Rothkugel formed “Trout Slayers Baked Breads Inc.”

They then signed standard-form “Distribution Agreements” on behalf of these entities. The agreements:

• Identified the new corporations as “distributors”;
• Expressly disclaimed any employee–employer relationship and stated the parties “intend to create an independent contractor relationship”; and
• Contained broad, mandatory arbitration clauses prohibiting class-wide proceedings and requiring individual arbitration of disputes.

Crucially, despite the new contractual and corporate framework:

• The drivers’ daily duties remained the same as before they incorporated.
• The “personal guarantee” provisions made Silva and Rothkugel personally and unconditionally liable for the performance of obligations under the Agreements—including, as the court emphasizes, the performance of the delivery work itself.

B. The Lawsuit and the Motion to Compel Arbitration

Silva and Rothkugel filed a putative class action in Connecticut Superior Court alleging that Schmidt violated Connecticut wage and overtime laws. Schmidt removed the case to the U.S. District Court for the District of Connecticut based on diversity jurisdiction.

Schmidt then moved to:

• Compel arbitration under the FAA, and
• Stay the court proceedings.

The drivers opposed the motion, arguing that:

1. The Distribution Agreements are “contracts of employment” of transportation workers and therefore fall within the FAA’s § 1 exemption, so the FAA does not authorize compelling arbitration.
2. They, as individuals, were not parties to the Agreements and thus not bound by the arbitration clauses.
3. Even if otherwise applicable, the arbitration clauses were unenforceable on other grounds (e.g., unconscionability, though the opinion does not detail all such arguments).

C. The District Court’s Ruling

The district court (Shea, C.J.) granted Schmidt’s motion to compel arbitration. See Silva v. Schmidt Baking Distr., LLC, 732 F. Supp. 3d 194 (D. Conn. 2024). It held:

• The Agreements, being formally between business entities, were not “contracts of employment” under FAA § 1.
• The § 1 exemption therefore did not apply, and the FAA required enforcement of the arbitration clauses.
• The plaintiffs’ arguments about non-party status and unenforceability were unavailing.

At the same time, the district court recognized a troubling policy implication: its ruling might “create a potential loophole that could undermine § 1’s purpose,” because the “actual work performed by workers under business-to-business contracts may be functionally indistinguishable from the work done in employment relationships.” Id. (later quoted by the Second Circuit).

D. Interlocutory Appeal Under 28 U.S.C. § 1292(b)

The drivers moved for certification of an interlocutory appeal. The district court certified its order under 28 U.S.C. § 1292(b), finding:

• The order presented a “controlling question of law”;
• There was “substantial ground for difference of opinion” regarding the question; and
• Immediate appeal could “materially advance the ultimate termination of the litigation,” by potentially avoiding an arbitration that might later be held improper.

A Second Circuit motions panel granted permission to appeal and specifically 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.”

On appeal, Schmidt argued that the interlocutory appeal should not have been granted. The Second Circuit, reviewing the § 1292(b) criteria de novo, declined to revisit the motions panel’s decision. The court emphasized:

• These were “difficult and of first impression” issues;
• The scope of the transportation worker exemption is “hotly contested” and litigated with increasing frequency; and
• System-wide benefits justified hearing the appeal now, rather than after potentially wasteful arbitration.

E. Standard of Review

Orders compelling arbitration are reviewed de novo. The court applies a standard “similar to that applicable for a motion for summary judgment,” considering all admissible evidence and drawing reasonable inferences in favor of the non-moving party. See Local Union 97 v. Niagara Mohawk Power Corp., 67 F.4th 107, 112 (2d Cir. 2023) (per curiam); Edmundson v. Klarna, Inc., 85 F.4th 695, 702 (2d Cir. 2023).

III. Summary of the Second Circuit’s Decision

The Second Circuit (Kahn, J., joined by Chin and Nardini, JJ.) vacated the order compelling arbitration and remanded. The key holdings are:

1. “Contracts of employment” under § 1 are not limited to contracts in which the worker is a formal corporate-party. Following New Prime, the court holds that in 1925 “contracts of employment” meant, broadly, any agreement “for the performance of work by workers,” and that contemporaneous usage included contracts between business entities. Thus, contracts signed between corporations can still be “contracts of employment” for § 1 purposes.
2. Where a corporation is a mere instrumentality through which an individual transportation worker provides services, the business-to-business contract is a § 1 “contract of employment.” The record showed that Silva’s and Rothkugel’s corporations existed solely because Schmidt required them, that the work remained identical, and that the Agreements contained personal guarantees blurring the line between corporate and individual obligations. Accordingly, the court deems the Distribution Agreements to be “contracts of employment.”
3. Silva and Rothkugel are transportation workers “engaged in foreign or interstate commerce” within the meaning of § 1. Their truck-driving work directly affected “the free flow of goods,” placing them in the category of transportation workers protected by the exemption.
4. The FAA’s transportation worker exemption applies even when the contract is signed by a worker’s corporation, so long as the contract is substantively for that worker’s labor. The court rejects a formalistic reading that would turn on the nominal identity of the contracting parties.
5. The court distinguishes cases involving “sizable corporate entities” that employ many drivers. It explains that its holding is confined to individual workers operating through small, employer-imposed corporate forms, and does not extend § 1 to large logistics or delivery companies contracting with shippers.

Because the Agreements at issue are “contracts of employment” of transportation workers, the § 1 exemption removes them from the FAA’s coverage. The FAA therefore does not authorize compelling arbitration or staying the action. The Second Circuit vacates the district court’s order and remands for further proceedings consistent with its opinion.

Importantly, the court does not decide whether arbitration might be compelled under state arbitration law, or whether Silva and Rothkugel are personally bound to arbitrate under any non-FAA theory; those questions remain for the district court on remand, if raised.

IV. The Legal Framework and Precedents Informing the Decision

A. The FAA and the Transportation Worker Exemption

The Federal Arbitration Act of 1925 was enacted to overcome judicial hostility to arbitration and to establish a “liberal federal policy favoring arbitration agreements.” See Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). But Congress carved out a narrow class of “contracts of employment”:

“§ 1. ‘… but 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.

The Supreme Court in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), held that this exemption does not apply to all employment contracts. Instead, the phrase “any other class of workers engaged in foreign or interstate commerce” is restricted—via ejusdem generis—to transportation workers akin to seamen and railroad employees. Circuit City emphasized that:

• § 1 must be “afforded a narrow construction” in defining the category of workers covered; and
• Non-transportation workers (such as the retail sales employee in Circuit City) fall outside the exemption, so their employment arbitration agreements are subject to the FAA.

However, Circuit City did not address the question presented in Silva: once a worker is within the covered transportation worker class, does § 1’s applicability turn on who formally signs the contract?

B. New Prime Inc. v. Oliveira: Broad Reading of “Contracts of Employment”

The turning point for modern § 1 analysis is New Prime Inc. v. Oliveira, 586 U.S. 105 (2019). There:

• New Prime, a trucking company, had labeled a driver an “independent contractor” under a contract that contained an arbitration clause.
• The company argued that because the driver was not an “employee,” his contract was not a “contract of employment” under § 1.

The Supreme Court rejected this argument. Applying “fundamental” textualist methodology, it asked how “contracts of employment” would have been understood in 1925. Reviewing contemporary legal materials and dictionaries, the Court concluded:

“Congress used the term ‘contracts of employment’ in a broad sense to capture any contract for the performance of work by workers,” regardless of whether the relationship would be deemed an employee–employer or independent-contractor arrangement. New Prime, 586 U.S. at 116 (emphasis in original).

Thus, the § 1 exemption extends to independent contractors as well as formal employees, so long as they are transportation workers.

Notably, in the underlying district court proceedings in Oliveira, the driver had actually formed a corporate entity at the company’s direction and signed the contract in that corporate capacity. See Oliveira v. New Prime, Inc., 141 F. Supp. 3d 125, 128 (D. Mass. 2015). Although the Supreme Court’s opinion did not focus on the corporate form, the Second Circuit in Silva points out this factual similarity to underscore that New Prime did not treat corporate intermediation as disqualifying.

C. Oliveira v. New Prime (1st Cir.) and the “Narrow Construction” of § 1

On remand and in pre-Supreme Court proceedings, the First Circuit in Oliveira v. New Prime, Inc., 857 F.3d 7 (1st Cir. 2017), interpreted Circuit City’s admonition that § 1 should be given a “narrow construction” as directed at the scope of the ‘class of workers’ who are ‘engaged in foreign or interstate commerce’, not at the types of agreements that may count as “contracts of employment.”

The Second Circuit in Silva adopts that reading: Circuit City limits who is a covered worker, not whether a contract has the right formal parties.

D. Bissonnette v. LePage Bakeries and the Transportation-Industry Question

The opinion notes, in a footnote, Bissonnette v. LePage Bakeries Park St., LLC, 49 F.4th 655 (2d Cir. 2022), which was later vacated and remanded by the Supreme Court, 601 U.S. 246 (2024). Bissonnette involved distributors of bakery products—similar in function to Silva and Rothkugel—and raised the question whether the § 1 exemption applies only if the employer is itself in the “transportation industry.”

The Supreme Court has since clarified that being in the transportation industry is not a categorical requirement; rather, the focus is on the workers’ activities—whether they are a “class of workers engaged in foreign or interstate commerce.” That clarification undercuts any argument that workers delivering baked goods for a manufacturer cannot be transportation workers unless their employer is itself a transportation company.

Silva benefits from this modern approach: there is no serious dispute that the drivers’ truck-based distribution of goods made them transportation workers.

E. Adler v. Gruma Corp. (3d Cir. 2025): Franchise Agreements as Contracts of Employment

The Third Circuit’s decision in Adler v. Gruma Corp., 135 F.4th 55 (3d Cir. 2025), plays an important supporting role. There, the court held that a franchise agreement was a “contract of employment” under § 1 because the agreement itself and undisputed facts showed that the plaintiffs contracted to “perform work” by distributing the defendant’s food products.

The Second Circuit explicitly endorses this reasoning, stressing that:

• The presence of additional commercial features (such as purchase of distribution rights) does not negate the reality that the core of the agreement is an obligation to perform work; and
• Franchise or distributor labels and structures cannot strip transportation workers of § 1’s protection when, substantively, they are performing the work of delivering goods in commerce.

F. Fli-Lo Falcon (9th Cir.), Amos (4th Cir.), and Tillman (6th Cir.): Sizable Corporate Contractors

The court also engages with recent cases from other circuits concerning Amazon’s “Delivery Service Partner” model:

• Fli-Lo Falcon, LLC v. Amazon.com, Inc., 97 F.4th 1190 (9th Cir. 2024) – Three plaintiff corporations, each employing “tens or hundreds” of drivers and managing multiple delivery routes. The Ninth Circuit held that “contracts of employment” under § 1 do not extend to such commercial agreements with business entities that themselves employ transportation workers; a business entity is not “similar in nature” to a transportation worker for purposes of the exemption.
• Amos v. Amazon Logistics, Inc., 74 F.4th 591 (4th Cir. 2023) – A plaintiff formed a corporation and then hired a fleet of about 450 drivers to carry out Amazon delivery routes. The Fourth Circuit held that “sizable corporate entities are not ‘similar in nature’ to the actual human workers” covered by § 1 and declined to apply the exemption.
• Tillman Transportation, LLC v. MI Business Inc., 95 F.4th 1057 (6th Cir. 2024) – Along similar lines, the Sixth Circuit treated substantial corporate carriers that employ their own drivers as outside the § 1 exemption.

These cases are distinguished in Silva on the basis of scale and structure. The Second Circuit agrees that agreements with large, independent logistics companies employing many drivers are not “contracts of employment” of transportation workers. But it notes that both Fli-Lo and Amos left open the possibility that some business entities might qualify, depending on their relationship to the actual human workers.

V. The Court’s Legal Reasoning

A. Reaffirming the Appropriateness of Interlocutory Appeal

Before reaching the merits, the court rebuffs Schmidt’s challenge to the interlocutory appeal. Under § 1292(b), the court must determine whether:

• There is a controlling question of law;
• There is substantial ground for difference of opinion; and
• An immediate appeal may materially advance the litigation.

The court finds all three satisfied, emphasizing the recurring and unsettled nature of the FAA § 1 issues. It also notes that proceeding to an arbitration later found improper would impose unnecessary burdens, whereas early resolution of this threshold question promotes judicial efficiency.

B. Interpreting “Contracts of Employment” After New Prime

The core of the opinion is its interpretation of the phrase “contracts of employment” in § 1. Building directly on New Prime, the court:

1. Rejects any suggestion that “contracts of employment” is a narrow term of art. In 1925, it was used broadly to describe agreements for work, not just formal employee–employer contracts.
2. Recognizes that contemporaneous judicial opinions used “contract of employment” to describe business-to-business agreements. The court cites numerous late-19th and early-20th century decisions in which courts referred to:
   • Contracts between corporations;
   • Contracts between partnerships; and
   • Agreements involving labor unions—
   as “contracts of employment.”
3. Draws a textual distinction between “contracts of employment of” workers and “contracts of employment with” workers.
   • “Of” in 1925 usage indicated the object of the contract—i.e., that it relates to the employment of certain workers, not that those workers must be signatories.
   • “With” would more naturally denote a requirement that the worker be the counterparty.
   • Congress chose “of.” Had it intended to exclude agreements where the formal party is a corporation, it “could easily have done so” by using different language.

From this, the Second Circuit concludes that:

“We cannot conclude that a contract is not a ‘contract of employment’ merely because it is signed by business entities.”

C. Reconciling Circuit City’s “Narrow Construction”

Schmidt argued that Circuit City’s statement that the § 1 exclusion must be narrowly construed required limiting the exemption to agreements where the individual worker is a direct party. The Second Circuit rejects this:

• Circuit City was concerned with who counts as a “class of workers engaged in foreign or interstate commerce.”
• It rejected the notion that § 1 extends to all employment contracts within Congress’s commerce power.
• It did not address the question whether a contract between corporations can be a “contract of employment” when it is in substance an agreement for the work of transportation workers.

Citing the First Circuit’s analysis in Oliveira, the court emphasizes that Circuit City’s narrow construction cannot be transformed into a tool for excluding actual transportation workers from § 1 based on contracting formalities:

“[T]his context is critical. The [Supreme] Court announced the need for a narrow construction of the § 1 exemption in the course of ‘rejecting the contention that the meaning of the phrase "engaged in commerce" in § 1 of the FAA should be given a broader construction than justified by its evident language.’” (Oliveira quoting Circuit City.)

Because Silva and Rothkugel plainly perform truck-driving work that directly impacts “the free flow of goods,” they are paradigmatic transportation workers, not borderline cases like the retail worker in Circuit City. The “narrow construction” principle cannot be invoked to exclude them based on the identity of the nominal contracting party.

D. Substance Over Form: Corporations as “Mere Instrumentalities”

The heart of the decision is its insistence on substance over form. The court is explicit that if it accepted Schmidt’s argument, employers could easily gut § 1:

• Any transportation company could insist that drivers form one-person corporations or LLCs;
• Agreements would be drafted as “independent contractor,” “franchise,” or “distributor” deals between corporations; and
• Employers would claim that § 1 does not apply because the worker is no longer a party to a “contract of employment.”

The Second Circuit refuses to endorse this loophole. Instead, it:

1. Looks to the practical genesis and function of the corporations. Silva and Rothkugel:
   • Were already performing the work as W‑2 drivers (through a staffing agency);
   • Were told that incorporation was a non-negotiable condition of continued work; and
   • Had no independent entrepreneurial reason to form these corporations.
   The corporations existed solely because Schmidt required them, and only to channel the same individual labor under a different label.
2. Emphasizes that the nature of the work did not change. Both before and after incorporation, the drivers:
   • Drove trucks to Schmidt’s warehouse;
   • Picked up baked goods;
   • Delivered, unloaded, and stocked products at retail locations.
   The economic reality of the relationship remained a driver delivering goods for Schmidt.
3. Relies heavily on the “personal guarantee” provisions. The Agreements made the individual drivers personally and unconditionally liable for the performance of:
   • Financial obligations, and
   • Performance of the work itself.
   This contract structure “blurs the line between a supposedly business-to-business contract and an agreement for personal services.” The court notes the incongruity of allowing Schmidt to look to the individual driver for performance, while simultaneously insisting that courts look only to the corporation’s name on the signature line.

To explain its substance-over-form approach, the court analogizes (cautiously) to veil-piercing doctrines: in corporate law, courts may disregard corporate separateness when entities are mere “alter egos” and honoring the fiction would “sanction a fraud, promote injustice, or promote inequitable consequences.” Although the court explicitly stops short of saying the drivers’ corporations are shams for veil-piercing purposes, the analogy underscores a familiar legal theme: courts sometimes must look past formal structures to the actual nature of the relationship.

Here, “[t]he record on appeal unequivocally demonstrates that Silva’s Baked Goods and Trout Slayers Baked Breads Inc. are mere instrumentalities incorporated at Schmidt’s behest through which the parties have contracted ‘for the performance of work by workers.’” On that basis, the court holds that the Agreements are “contracts of employment” within § 1.

E. Rejecting the “Franchisor–Franchisee” and “Supplier–Distributor” Labels

Schmidt argued that the Agreements were properly viewed as:

• Franchisor–franchisee agreements, or
• Supplier–distributor arrangements,

because they purported to sell the drivers “the sole right to sell and distribute Products to Outlets in the Sales Area.” On this theory, the driver corporations supposedly bought distribution rights and then independently conducted a business, rather than contracting to perform labor for Schmidt.

The court rejects this distinction as irrelevant to the statutory language:

• Section 1 contains no special carve-out for franchises or distributorships.
• A contract may contain multiple features—sale of rights, assignment of territory, etc.—but still be, at its core, a contract under which a worker (or worker’s corporation) is obligated to perform work.

Citing Adler v. Gruma, the court agrees that:

“[T]he agreement itself and undisputed facts show[ed] Plaintiffs contracted with Defendant to ‘perform work’ by distributing Defendant’s food products.”

The same is true of Silva’s and Rothkugel’s Agreements: although couched in distributor/franchise terms, they primarily obligated the drivers to deliver Schmidt’s baked goods.

F. Distinguishing Contracts with Sizable Corporate Contractors

The court is careful not to read § 1 so broadly that it would cover large transport companies that have their own fleets and employees. It distinguishes:

• Fli-Lo Falcon: Plaintiffs’ corporations each hired “tens or hundreds” of employees and managed multiple routes. Those corporations were business entities that themselves employed transportation workers; as such, they were not “similar in nature” to the workers listed in § 1 (seamen and railroad employees).
• Amos: The plaintiff’s corporation employed about 450 drivers. The Fourth Circuit concluded that contracts with such “sizable corporate entities” are not “contracts of employment” of workers.
• Tillman: The Sixth Circuit reached a comparable result with respect to larger trucking entities.

The key distinction, according to the Second Circuit, is that:

• Silva and Rothkugel did not form substantial logistics companies;
• They did not hire fleets of other drivers; and
• They were individual transportation workers required by Schmidt to adopt a corporate form to continue their own, personal driving work.

They faced a “Hobson’s choice”: incorporate or lose their jobs. Their corporations are functionally vehicles for their own labor, not independent enterprises employing a workforce.

This distinction allows the Second Circuit to:

• Preserve a boundary between agreements with actual human transportation workers (or their one-person corporate shells) and agreements with large corporate carriers; and
• Avoid a direct conflict with Fli-Lo, Amos, and Tillman, while still rejecting the extreme position that any corporation as a contracting party defeats § 1.

The court notes that both the Ninth and Fourth Circuits themselves acknowledged that “there may be circumstances under which a business entity could qualify for the transportation worker exemption,” confirming that the door was never entirely closed to the approach the Second Circuit adopts here.

G. Application to the Facts

Summarizing its application of law to facts, the court concludes:

1. The Agreements are the operative contracts under which Silva and Rothkugel perform transportation work. They are the instruments through which Schmidt obtains the drivers’ delivery services.
2. The work performed under those contracts is transportation work in interstate commerce. The drivers’ delivery of products to retailers directly affects the “free flow of goods” across state and commercial channels, placing them in the category of transportation workers covered by § 1.
3. The presence of corporate entities does not alter the reality that the contracts are for “the performance of work by workers.” The corporations are “mere instrumentalities” created at Schmidt’s behest to recast what is in substance an individual work relationship as a commercial distribution arrangement.
4. Therefore, these Agreements are “contracts of employment of … [a] class of workers engaged in foreign or interstate commerce” under § 1.
5. Consequently, the FAA does not apply. Section 1 expressly states that “nothing” in the Act applies to such contracts, meaning the FAA’s provisions requiring enforcement of arbitration agreements do not govern here.

Accordingly, the Second Circuit vacates the order compelling arbitration under the FAA and remands. The opinion does not resolve whether arbitration can be compelled under other law (e.g., state arbitration statutes), nor does it decide whether the individual drivers are bound as non-signatories; those questions, if pursued, will be litigated on remand.

H. Waiver and New Arguments on Appeal

Schmidt also argued that the drivers had waived certain legal arguments by not fully presenting them below. The Second Circuit rejects this, noting:

• The arguments were sufficiently raised in the district court; and
• Even if some nuance were new, the court could consider pure questions of law that require no additional fact-finding, citing Allianz Ins. Co. v. Lerner, 416 F.3d 109, 114 (2d Cir. 2005).

This underscores the court’s view that the interpretive question about the reach of § 1 is squarely presented and ripe for appellate resolution.

VI. Simplifying Key Concepts and Doctrines

A. The FAA’s § 1 Transportation Worker Exemption

The FAA generally requires courts to enforce written arbitration agreements. But § 1 excludes:

• Contracts of employment of seamen;
• Contracts of employment of railroad employees; and
• Contracts of employment of “any other class of workers engaged in foreign or interstate commerce” (i.e., transportation workers).

If a contract falls within this exemption:

• The FAA’s enforcement mechanisms (compel arbitration, stay proceedings, etc.) do not apply.
• Parties may still arbitrate if other law (e.g., state law) enforces the arbitration clause, but they lose the FAA’s special federal protections and preemptive force.

B. “Contracts of Employment” in Modern Terms

After New Prime, “contracts of employment” in § 1 means:

• Any agreement for a worker to perform work,
• Whether the worker is labeled an employee, an independent contractor, or something else.

Labels in the contract (“independent contractor,” “distributor,” “franchisee”) do not control. The question is what the contract actually does: does it obligate a worker to perform work?

C. “Transportation Worker”

A “transportation worker” is someone whose job is directly involved in the movement of goods or passengers in interstate or foreign commerce, such as:

• Truck drivers moving goods;
• Railroad workers;
• Seamen and dock workers handling cargo;
• Airport ramp workers loading and unloading aircraft.

Following decisions like Southwest Airlines Co. v. Saxon and Bissonnette, the focus is on the worker’s activities, not on the industry label of the employer.

D. “Mere Instrumentalities” and Substance Over Form

A “mere instrumentality” in this context refers to a corporate entity that:

• Exists only because another party required its creation;
• Has no independent business purpose beyond funneling one person’s labor; and
• Does not materially change who is doing the work or under what practical conditions.

Courts sometimes disregard formal structures in favor of the underlying reality. Here, the Second Circuit does not formally pierce the corporate veil, but applies a similar functional lens to decide whether a contract is, in essence, a contract for a worker’s labor.

E. Personal Guarantees

A “personal guarantee” is a contractual promise by an individual to be personally liable for a company’s obligations. In this case, the personal guarantees:

• Made Silva and Rothkugel personally responsible not only for financial obligations, but also for the performance of the delivery work;
• Undermined the idea that only the corporation was providing services; and
• Showed that Schmidt ultimately relied on the individuals, not just their entities, to fulfill the contract.

F. Hobson’s Choice

A “Hobson’s choice” is a situation where a person appears to have a choice, but in reality has only one viable option (e.g., “take it or leave it”). Silva and Rothkugel were told:

• Incorporate and sign the Distributor Agreements, or
• Lose their ability to continue working as drivers.

This highlights the lack of meaningful bargaining and further supports treating the Agreements as functional employment contracts rather than arms-length B2B deals.

G. Interlocutory Appeals Under 28 U.S.C. § 1292(b)

Ordinarily, parties must wait for a final judgment to appeal. Section 1292(b) allows “interlocutory” (mid-case) appeals where a district court certifies that:

• Its order involves a controlling question of law;
• There is substantial ground for difference of opinion; and
• An immediate appeal may materially advance the litigation.

Appellate courts then have discretion to accept or reject such appeals. In Silva, the Second Circuit accepted the appeal to clarify an important and recurring question of federal arbitration law.

VII. Likely Impact and Significance

A. Closing a Loophole in the Transportation Worker Exemption

The most immediate impact of Silva is to foreclose a straightforward mechanism for avoiding § 1:

• Employers can no longer assume that requiring drivers to incorporate and sign distribution or franchise agreements with their own one-person corporations automatically takes those contracts outside the § 1 exemption.
• Courts in the Second Circuit must look at the substance of the arrangement: is the agreement effectively a contract for an individual worker’s labor in interstate commerce?

This protects the statutory design: transportation workers, a category historically subject to specialized labor regimes, remain outside the FAA unless Congress expressly brings them back under its umbrella.

B. Implications for Gig, Last-Mile, and Distribution Models

Silva will resonate far beyond traditional trucking:

• Food and beverage distributors: Companies that use “independent distributor” models—especially where distributors are single-person entities performing route deliveries—must now assume those agreements may be treated as § 1 contracts of employment if the distributors are transportation workers.
• Last-mile and gig delivery: To the extent companies require drivers to incorporate or contract through single-member entities, and those drivers are involved in moving goods in interstate commerce, Silva suggests that § 1 may still apply, notwithstanding the corporate form.
• Staffing and conversion strategies: The practice of converting W‑2 drivers to “independent contractor” distributors via forced incorporation will not suffice, by itself, to ensure availability of FAA-based arbitration in the Second Circuit.

Employers wishing to rely on the FAA’s pro-arbitration regime will need to consider whether their workers truly fall outside the transportation worker exemption, rather than simply altering forms and labels.

C. Increased Threshold Litigation Over § 1

Although the court stresses that many § 1 issues will be resolvable from the face of the contract plus limited evidence, Silva will likely:

• Encourage workers’ counsel to challenge arbitration clauses in transportation cases more aggressively;
• Prompt employers to develop factual records demonstrating that their contractors are genuinely “sizable corporate entities” with independent operations, where that is the case; and
• Lead to more nuanced, fact-sensitive disputes about whether a given contractor is a mere instrumentality of a single worker or a true business enterprise employing others.

In the short term, parties can expect more motion practice at the outset of litigation over whether the FAA applies at all.

D. Harmonizing and Tension with Other Circuits

The Second Circuit is clearly aware of the risk of creating a circuit split. By:

• Endorsing the general principle of Fli-Lo and Amos that truly substantial corporate carriers are not themselves transportation workers; and
• Limiting its holding to forced, one-person incorporations where the worker remains the only one performing the work,

the court endeavours to keep its rule compatible with the Ninth, Fourth, and Sixth Circuits’ approaches while preserving the core of New Prime’s broad view of “contracts of employment.”

Nonetheless, the line between:

• a “mere instrumentality” corporation qualifying for § 1, and
• a “sizable corporate entity” that does not,

is not sharply defined. Different circuits may draw that line differently. That ambiguity could eventually invite Supreme Court review, especially if lower courts diverge over factors such as:

• Number of drivers employed;
• Ownership of vehicles and other capital;
• Control over hiring, firing, and supervision;
• Economic dependence on a single principal.

E. Consequences for Arbitration and Class Actions

For Silva and Rothkugel and similarly situated workers:

• The FAA cannot be used to compel individual arbitration or to enforce class-action waivers, at least insofar as the § 1 exemption applies.
• They may be able to pursue class or collective claims in court under state wage-and-hour statutes.
• Schmidt may attempt to rely on state arbitration law, but such efforts will face additional hurdles, including state unconscionability doctrines that are sometimes preempted in FAA cases.

In the broader landscape:

• Workers in the transportation sector will see § 1 as a more robust shield, not easily defeated by corporate structuring.
• Employers may turn to contract drafting strategies other than forced incorporation (e.g., modifying the nature of the work or avoiding interstate commerce) if they wish to remain within the FAA.

VIII. Conclusion

Silva v. Schmidt Baking Distribution, LLC is a significant development in the law of arbitration and transportation work. It extends the Supreme Court’s reasoning in New Prime by:

• Confirming that “contracts of employment” under § 1 include agreements signed between business entities, so long as they are substantively “for the performance of work by workers”;
• Holding that employer-imposed incorporation and franchising structures do not, by themselves, remove transportation workers from § 1’s protection; and
• Preventing employers from using corporate formalities as a tool to nullify a statutory exemption that Congress specifically enacted for transportation workers.

At the same time, the court preserves an important limit: contracts with sizeable, independent corporate carriers that employ many drivers are not, without more, “contracts of employment” of workers. The key inquiry is whether the contracting entity is a genuine business enterprise or a mere instrumentality for a single worker’s labor.

By vacating the order compelling arbitration, the Second Circuit ensures that Silva’s and Rothkugel’s wage-and-hour claims proceed outside the FAA’s mandatory arbitration regime. More broadly, the decision signals to employers that the FAA’s transportation worker exemption cannot be side-stepped through clever drafting or forced corporate structuring. The statutory promise that certain transportation workers may seek judicial, rather than arbitral, resolution of their disputes remains intact.