December 22, 2025|Franchise Frontlines
December 22, 2025 | United States Court of Appeals for the Second Circuit | 162 F.4th 354 (2d Cir. 2025)
Executive Summary
In a precedential opinion, the United States Court of Appeals for the Second Circuit held that delivery drivers who were required to form single-employee corporations and sign “Distributor Agreements” containing arbitration clauses were nonetheless covered by the transportation worker exception to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1. The district court had compelled arbitration of the drivers’ wage-and-hour claims, concluding that the agreements were not “contracts of employment” because they were executed by corporate entities rather than individuals. The Second Circuit vacated and remanded, holding that courts must look to the substance of the relationship, not its formal structure, and that an employer cannot circumvent the FAA’s transportation worker exception by requiring workers to adopt a corporate form. Silva v. Schmidt Baking Distrib., LLC, 162 F.4th 354, 362–64 (2d Cir. 2025). The decision has meaningful implications for distributor, route, and franchise-adjacent models that rely on incorporation or independent contractor structuring.
Relevant Background
The plaintiffs were commercial truck drivers delivering baked goods in Connecticut. Initially, they performed deliveries as W-2 employees of a staffing agency. After several months, the baking company informed them that in order to continue performing delivery work, they would need to form their own corporations and execute “Distribution Agreements” through those entities. 162 F.4th at 357–58.
Each driver formed a single-employee corporation at the company’s direction. In their capacity as corporate officers, they signed distributor agreements with the company’s distribution subsidiary. The agreements expressly disclaimed an employment relationship, characterized the corporations as independent contractors, and contained mandatory arbitration provisions prohibiting class proceedings. Id. at 358.
The drivers filed a putative class action alleging violations of Connecticut wage and overtime laws. After removal to federal court, the company moved to compel arbitration. The district court granted the motion, holding that the agreements were not “contracts of employment” within the meaning of § 1 of the FAA because they were between business entities rather than between an employer and individual employees. Id. at 359.
The drivers sought interlocutory review under 28 U.S.C. § 1292(b), which the Second Circuit granted. Id. at 359–60.
Decision
The central issue on appeal was whether agreements executed by single-employee corporations formed at the company’s insistence were “contracts of employment” under § 1 of the FAA. That provision exempts from the Act “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1.
Relying heavily on the Supreme Court’s reasoning in New Prime Inc. v. Oliveira, 586 U.S. 105 (2019), the Second Circuit emphasized that “contracts of employment” must be understood according to their ordinary meaning in 1925, when the FAA was enacted. 162 F.4th at 360–61. In New Prime, the Supreme Court held that the phrase was not limited to formal employer-employee relationships but broadly encompassed agreements to perform work, including those with independent contractors. Id.
Applying that framework, the Second Circuit rejected the notion that the corporate form was dispositive. The court explained that the text of § 1 refers to “contracts of employment of” workers, not “with” workers, and that nothing in the statutory language excludes contracts simply because they are executed by business entities. Id. at 361–62. The court observed that historical usage of “contract of employment” included agreements between corporations, partnerships, and labor organizations. Id.
Most significantly, the court adopted a substance-over-form analysis. It held that courts must look to “the substance of an agreement, not its formalities,” to determine whether it is a contract of employment. Id. at 362. The drivers were performing the same transportation work before and after incorporation. They did not approach the company as entrepreneurs; rather, they were told that incorporation was a condition of continuing their delivery work. Id. at 363. The newly formed corporations were “mere instrumentalities created at [the company’s] behest to dress individual ‘contracts of employment’ in the garb of commercial transactions.” Id.
The court rejected the company’s argument that the agreements were more akin to franchisor-franchisee or supplier-distributor contracts. The inclusion of distribution rights and commercial language did not remove the agreements from § 1’s ambit where the core obligation was the performance of transportation work. Id. at 361–63.
At the same time, the court distinguished its holding from cases involving larger logistics businesses employing dozens or hundreds of drivers. It noted that contracts “between sizeable business entities with many employees” may fall outside the transportation worker exception. Id. at 364 (discussing Fli-Lo Falcon, LLC v. Amazon.com, Inc., 97 F.4th 1190 (9th Cir. 2024), and Amos v. Amazon Logistics, Inc., 74 F.4th 591 (4th Cir. 2023)). Here, however, the corporations were single-worker entities formed solely to facilitate continued personal service.
The Second Circuit concluded that the agreements were “contracts of employment” within the meaning of § 1 and that the transportation worker exception applied. The order compelling arbitration was vacated and the case remanded. Id. at 364.
Looking Forward
Although Silva arises in the wage-and-hour context, its reasoning has broader implications for distribution and franchise-adjacent business models. The court’s core holding—that the FAA transportation worker exception cannot be avoided through formal restructuring—signals continued judicial willingness to scrutinize substance over contractual labels.
For franchisors and companies operating route or distribution systems, the decision underscores several points. First, courts may look beyond corporate form where an individual performs the work and the entity is effectively a conduit. Second, disclaimers of employment status, while relevant, may not control the FAA § 1 analysis. Third, where transportation work is central to the agreement, courts may apply the exception even if the contract contains broader commercial terms.
Importantly, the decision does not hold that all business-to-business distributor or franchise agreements fall within the transportation worker exception. The Second Circuit expressly distinguished situations involving sizeable logistics companies employing multiple drivers and operating as independent businesses. The analysis remains fact-specific and turns on whether the agreement, in substance, is one for the performance of transportation work by a worker rather than by an independent operating enterprise.
Companies utilizing distributor, franchise, or route models should therefore evaluate arbitration strategies in light of how the workforce is structured in practice, not merely on how agreements are drafted. Clear delineation between independent business operations and individual service arrangements may be critical. Careful attention to operational realities—such as control, continuity of work, and the role of personal guaranties—can meaningfully affect whether arbitration provisions will be enforceable under the FAA.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter LLP and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
