Labor & Employment Law Daily Wrap Up, ARBITRATION—2d Cir.: Truck drivers’ ‘distributor agreements’ were employment contracts under Section 1 of FAA, (Jan 2, 2026)

By Jason Albright, J.D.

Section 1 of the FAA exempts from mandatory arbitration “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

A Maryland baked goods company was not entitled to compel arbitration against it, under the Federal Arbitration Act (FAA), of two commercial truck drivers’ putative Connecticut class wage claims, despite their entry into “Distribution Agreements” with the company that disavowed a relationship of employment and included mandatory arbitration provisions precluding class-wide proceedings, the Second Circuit held. The entities the drivers were required to create under their agreements with the company were “mere instrumentalities” incorporated at the company’s behest through which the parties contracted “for the performance of work by workers.” NewPrime Inc. v. Oliveira, 586 U.S. 105, 116 (2019). As such, the distributor agreements were “contracts of employment” within the meaning of Section 1 of the FAA (Silva v. Schmidt Baking Distribution, LLC, No. 24-2103-cv (2d Cir. Dec. 22, 2025)).

Section 1. The case, according to the court, concerns the interpretation of Section 1 of the Federal Arbitration Act (FAA), which excepts 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.

SBD. The two named plaintiffs delivered baked goods on behalf of Schmidt Baking Distribution, LLC (SBD) for some time as W-2 employees of a staffing agency. SBD, a Maryland company, coordinates the distribution of the products of Schmidt Baking Company, Inc. (SBC), a Maryland corporation, of which SBD is a wholly owned subsidiary.

Delivery drivers. In 2020, both named plaintiffs began delivering products for Schmidt. They worked as delivery drivers through a third-party staffing agency and were classified as W-2 employees of the staffing agency.

“Distributor Agreements.” After some months, however, SBD informed them that, to continue in their work, they would be required to incorporate and sign “Distribution Agreements” on behalf of their corporate entities, which included mandatory arbitration clauses.

Not experienced in corporate formation. Neither driver had prior experience forming or operating a corporation. Under instruction and with assistance from Schmidt, one named plaintiff formed “Silva’s Baked Goods,” and the other formed “Trout Slayers Baked Breads Inc.” In their capacities as “presidents” of their newly formed corporations, both drivers entered into “Distribution Agreements” with Schmidt to continue performing the same delivery work.

Employment relationship disavowed. The formal parties to the agreements were SBD and the plaintiffs’ respective corporations, which were termed “distributor[s].” Schmidt did not allow either driver to sign in their personal capacities. The agreements disavowed an employee-employer relationship and stated that the parties “intend to create an independent contractor relationship.” They also included mandatory arbitration provisions that barred class-wide proceedings, requiring individual adjudication of any dispute.

Roles remained unchanged. Despite the change to the contractual framework of their relationship with Schmidt, both drivers maintained, their roles remained unchanged. By sworn declaration, they averred that their daily responsibilities, both before and after they signed the agreements, involved driving a commercial truck to Schmidt’s warehouse to pick up fresh baked goods, delivering the products to retail outlets within their assigned territories, unloading the goods, and stocking them on retail shelves. They further declare that they had virtually no role in negotiating any pricing, sales, or promotions with retailers, which are functions carried out by Schmidt.

Connecticut wage-hour suit. The two drivers first filed suit in the Connecticut Superior Court, alleging that Schmidt violated Connecticut wage and overtime law. Schmidt removed the action to federal district court, invoking diversity jurisdiction. Schmidt then filed a motion to compel arbitration and to stay the district court proceedings, relying on the arbitration clauses in the agreements.

Arbitration compelled, interlocutory appeal. The district court granted Schmidt’s motion and rejected the drivers’ arguments that the agreements are “contracts of employment” under Section 1 of the FAA. The district court also found unavailing the drivers’ arguments regarding their non-party status and unenforceability.

The two then filed a motion to certify an interlocutory appeal pursuant to 28 U.S.C. § 1292(b), which the district court granted, and they then petitioned the Second Circuit for leave to appeal, which was granted.

New Prime. The Second Circuit initially observed that, in New Prime Inc. v. Oliveira, 586 U.S. 105, 108 (2019), the Supreme Court recently took up the interpretation of “contracts of employment” in Section 1 of the FAA. In New Prime, the Court considered a truck driver’s wage-hour suit against a trucking company that had hired him under a contract that labelled him an independent contractor. Examining whether the language in Section 1 limits the exception to contracts forming employer-employee relationships or whether it extends to independent contractor relationships, the Court held that contracts creating independent contractor relationships fall within the scope of the exception as well.

Circuit City. A prior Supreme Court case, Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 121 (2001), had concerned a retail sales counselor who argued that his contract fell under the Section 1 exception. The Court there rejected the Ninth Circuit’s extremely broad holding that Section 1 excepted all contracts of employment, even for workers who, like the plaintiff, did not engage in transportation, because it encompassed the full extent of Congress’s commerce power.

Distinguishing Circuit City, the Second Circuit found that the plaintiffs in this case perform truck-driving work that directly impacts “the free flow of goods,” and they “are clearly transportation workers who fall within the ambit of § 1 of the FAA.” Their work, the appeals court observed, “bears little resemblance to that of the sales counselor at issue in Circuit City, who was just as evidently not a transportation worker.”

“[C]ontracts of employment.” Turning to the substance of the agreements here, the Second Circuit concluded that they are “contracts of employment” within the meaning of Section 1 of the FAA. Some of the most telling evidence thereof, the appeals court noted, was the “personal guarantee” provisions of the agreements holding the drivers personally and unconditionally liable for the performance of the work. “This provision is not limited to financial liabilities,” the appeals court observed. “[I]t extends to the performance of the work itself and blurs the line between a supposedly business-to-business contract and an agreement for personal services. It would be incongruous to allow Schmidt to look, by the very terms of the contract, to the individual drivers for the fulfillment of transportation work while demanding that this Court look no further than the name of the company on the signature line.”

Hobson’s choice. The two drivers, the appeals court said, “are individual transportation workers who were required to incorporate to perform the same transportation services they had been performing as individuals.” They “were presented with a Hobson’s choice of adopting a corporate form or losing their jobs.”

The judgment of the district court was accordingly vacated and the case remanded.

The case is No. 24-2103-cv.

Judge: Kahn, M.

Attorneys: Matthew Thomson (Lichten & Liss-Riordan) for Nathaniel Silva and Phil Rothkugel. William J. Anthony (Littler Mendelson) for Schmidt Baking Distribution, LLC and Schmidt Baking Co., Inc.

Companies: Schmidt Baking Distribution, LLC; Schmidt Baking Co., Inc.

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