The Second Circuit Court of Appeals recently clarified the transportation worker exemption under § 1 of the Federal Arbitration Act (FAA). The court addressed whether contracts signed by individual delivery drivers, even when they work through their own corporations, count as “contracts of employment” that are exempt from mandatory arbitration. In this instance, the court found that they do count as such a contract.
Background
The case involved two commercial truck drivers who first worked as W-2 employees for a staffing agency, delivering baked goods for a distribution company.
After several months, the company required the drivers to create their own corporations and sign distributor agreements as the presidents of these new companies.
These agreements required mandatory arbitration and stated that the drivers were independent contractors, not employees. However, even with these new contracts, the drivers’ daily work did not change.
The drivers then filed a proposed class action in Connecticut state court, claiming the company violated wage and hour laws. The company moved the case to federal court and successfully requested that the dispute be sent to arbitration under the Federal Arbitration Act (FAA).
The district court in Connecticut decided that the distributor agreements did not count as “contracts of employment” under Section 1 of the FAA, so they were not exempt from arbitration. The drivers appealed this decision.
Second Circuit’s Analysis
On appeal, the Second Circuit closely examined the wording of the law and important Supreme Court decisions, especially New Prime Inc. v. Oliveira. In that case, the Supreme Court decided that “contracts of employment” under Section 1 of the FAA include any agreement for someone to perform work, no matter if the person is officially called an employee or an independent contractor.
The court stressed that what matters is the actual nature of the relationship, not just its official title or whether a company is involved, when deciding if an agreement counts as a “contract of employment.”
The court found that the corporations set up by the drivers were simply tools created under the company’s instructions, and the drivers kept doing the same transportation work as they had before.
The agreements required drivers to personally guarantee their work, making them personally responsible if obligations were not met. This further blurred the distinction between independent contractors and employees.
The court noted that, unlike cases involving large logistics companies with many employees, the drivers in this case were individual workers who were forced to form their own companies just to keep their jobs.
The court ruled that if employers could force workers to form corporations as a condition of employment, it would go against the purpose of the § 1 exemption and Congress’s goal of protecting transportation workers from being required to resolve disputes through mandatory arbitration.
Main Holdings
- Contracts signed by transportation workers through their own companies, when the actual working relationship is similar to employment, will likely be considered “contracts of employment” under § 1 of the FAA.
- Such contracts are not subject to the FAA’s arbitration requirements, even if they are officially set up as business-to-business agreements.
- The court canceled the district court’s order that required arbitration and sent the case back for more proceedings.
What This Means
This decision confirms that courts will examine the real nature of the working relationship, not just the contract’s wording, when deciding if the FAA’s transportation worker exemption applies.
Employers should understand that asking workers to form their own companies does not automatically protect employment agreements from being reviewed by courts or from exceptions to mandatory arbitration under the FAA.
The ruling offers valuable guidance on how to structure relationships with transportation workers and highlights the importance of considering both the actual terms and the practical realities of these agreements.
You can find the decision in the case, Silva v. Schmidt Baking Distribution, here.