In Silva v. Schmidt Baking Distribution, LLC, No. 24-2103 (2d Cir. 2025), the Second Circuit Court of Appeals said that contracts with two single employee corporations were contracts of employment under section 1 of the Federal Arbitration Act (FAA) which creates and an exception from the FAA. Section 1 says ““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 case arose after two individuals delivered baked goods for a distributor as w-2 employees of a staffing agency. They drove a commercial truck to the distributor’s warehouse, picked up fresh baked goods, and delivered them to retail outlets. After several months, the distributor informed them that to continue to work, they had to form corporations and sign distribution agreements (on behalf of their newly formed corporate entities) that included an arbitration clause. The agreements said that the relationship was an independent contractor relationship, and not an employer-employee relationship. The individuals continued to perform the same job and deliver backed goods to retail outlets after forming the corporation and signing hte agreement as they did before. The individuals sued and the distributor moved to compel arbitration.
The FAA supports the enforcement of arbitration agreements but excludes employment contracts with workers engaged in interstate commerce. The court considered whether the agreements were employement contracts under the FAA. The court looked at the substance of the agreements, and not merely its formalities, and noted that the actual work was functionally indistinguishable from the work in employment relationships. The court also relied on the personal guarantees made by the individuals in the distribution agreements, that the distributor directed them to form corporations, and the work remained the same to conclude that these were contracts of employment and not within the terms of the exception in the FAA.