You Can’t Incorporate Away Employment: Second Circuit Closes Corporate Loopholes Under Federal Arbitration Law
One of the most aggressively litigated issues in arbitration law is the scope of the Federal Arbitration Act (“FAA”). A particularly hot button topic is the construction of Section 1 of the FAA, aka the transportation worker exception, which excludes “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” In recent years, businesses have increasingly attempted to draft around that language and compel workers to arbitrate by reclassifying them as independent contractors or requiring them to operate through corporate entities.
In a matter of first impression, the Second Circuit recently made clear that courts will not allow corporate form or contractual labels to override the reality of a working relationship. When transportation workers are required to incorporate simply to continue doing the same job they performed as employees, those contracts still fall squarely within the FAA’s statutory exception.
The Case: Silva v. Schmidt Baking Distribution, LLC (2d Cir. 2026)
Nathaniel Silva and Phil Rothkugel worked as commercial truck drivers delivering baked goods for Schmidt Baking. They initially performed this work as W-2 employees through a staffing agency, but after several months, Schmidt informed them that they could only continue working if they formed corporations and signed “distribution” agreements through those entities.
Both Silva and Rothkugel formed business entities and signed form agreements that disclaimed any employee relationship, labeled them as independent contractors, and required all disputes to be resolved through arbitration under the FAA. Despite this restructuring, Silva and Rothkugel’s work remained unchanged.
When Silva and Rothkugel sued for wage and overtime violations, Schmidt moved to compel arbitration under the agreements. The district court granted the motion, holding that the agreements were not “contracts of employment” because they were between corporate entities.
The Second Circuit reversed the decision. Relying on the U.S. Supreme Court’s decision in New Prime Inc. v. Oliveira, 586 U.S. 105 (2019), the Court held that “contracts of employment” under the FAA means any agreement to perform work, regardless of whether the worker is labeled an independent contractor or required to structure their employment through a corporate entity. Because Silva and Rothkugel were transportation workers engaged in interstate commerce, their agreements fell within the FAA’s § 1 exception, and they could not be compelled to arbitrate their labor law claims.
Takeaway
Silva reinforces the Supreme Court’s position in New Prime that substance, not form, controls under the FAA. Employers cannot sidestep exceptions by forcing workers to incorporate or labeling them as independent contractors. Where a worker is performing transportation services and the corporate form is merely a shell, courts will treat the agreement as a “contract of employment” under § 1 of the FAA. For practitioners, the lesson is simple: arbitration clauses will not be enforced if they are used as a drafting tool to evade statutory protections.