Earlier this week, I attended oral argument in a Second Circuit appeal regarding the FAA’s transportation worker exemption. The case is called Silva v. Schmidt Baking Distribution, LLC, No. 24-2103, and the central legal issue in this case is whether a business entity can qualify under the FAA exemption. Although the argument was scheduled for 20 minutes, the argument lasted almost an hour, with challenging, thoughtful questions from the panel for both attorneys.
It’s difficult to predict how the Second Circuit panel will rule. But courts that have already addressed this narrow legal issue have held that businesses cannot qualify for the exemption, and so the Second Circuit is likely to reach the same conclusion in this matter. Additionally, the Supreme Court has been giving greater attention to the transportation worker exemption in a series of cases in recent years, and if the Second Circuit issues a ruling contrary to the other courts, there is a stronger chance than usual for the Supreme Court to grant cert to review the Second Circuit’s decision. In other words, convincing the Second Circuit to find that a business can qualify for the exemption is an uphill battle. However, the questioning from the Second Circuit panel suggests the judges see the issue as a close one, and the judges may be open to finding that businesses can qualify for the exemption.
I see 2 possible routes for the Second Circuit to find that businesses can qualify for the exemption.
First, the judges can take a very literal approach and find that business entities qualify for the exemption under a broad, but literal, reading of the section 1 exemption. The judges during oral argument correctly recognized that the Supreme Court in New Prime has taken a literal approach when interpreting the exemption. I believe Judge Nardini of the panel described New Prime as involving a “hyper-textual” analysis. If we construe “contracts of employment” from section 1 of the FAA using the New Prime lens, we should not be restrained by narrow or limited concepts of employment or employment law. The phrase “contract of employment” is to be construed broadly under New Prime; the phrase literally means a work contract. For example, I may “employ” a law firm (a business entity consisting of lawyers) to represent me. Or I may “employ” a gardener or small team of gardeners to mow my lawn, or I may “employ” a painter or team of painters to paint my house. And possibly the gardener or painter may or may not operate through a business entity. All these agreements would involve “contracts of employment.” If I hire a law firm, a business entity, or a gardener operating through or as a business entity, I have employed the firm, and I have a “contract of employment” of lawyers or a contract of employment of gardeners. Remember, according to New Prime, employment was not a term of art and did not narrowly mean a technical employee-employer relationship. Similarly, the contract at issue here, whereby the baking company hired an LLC to deliver goods, is a contract of employment of transportation workers. Thus, under a literal, but broad, reading of the exemption under the New Prime lens, the exemption would apply to contracts for performing transportation work, regardless of whether the work is performed through a corporate entity or not. As a result, businesses could qualify for the exemption.
This first route for the Second Circuit would involve a broad ruling (whereby businesses can qualify for the exemption), but a second, more limited basis is available as well. As a second possible basis for ruling in favor of the appellants/workers in this case, the Second Circuit can adopt a more limited “sham” exception. The Second Circuit may construe the phrase “contract of employment” narrowly to involve a contract hiring natural persons for work, not a business entity at all, and under a fact-specific inquiry, courts would then examine whether the governing documents purporting to involve a business entity really in fact involve a human worker. For example, if a worker commences a relationship as a W2 worker for an employer, and then the employer requires and assists this same worker to create an LLC for the purpose of evading the FAA’s exemption, a court may treat the business entity as a sham designed to circumvent the FAA’s exemption. In other words, the exemption does not cover businesses at all and is limited to flesh-and-blood persons, and so a worker operating through a “sham” business entity could still rely on the exemption. A similar issue exists in other areas of employment law (for example, where an employer requires a worker to create an LLC in an attempt to avoid minimum wage or civil rights laws.)
Near the end of oral argument, Judge Nardini asked a question about why these issues surrounding transportation workers are more common today, in recent years, and why weren’t these issues resolved 100 years ago or shortly after the FAA was adopted. The main reason why is that for the first several decades of the FAA’s existence, the FAA was not viewed as applicable to any worker or employment relationship at all. My historical research has confirmed that the dissent in Circuit Circuit is correct. Also, I believe arbitration clauses have become more widespread since the 1990s. Furthermore, the New Prime case from 2019 (which marks a shift in FAA jurisprudence from a policy-driven analysis to a more textual analysis) opened the door to greater use of the transportation worker exemption. I am eager to see how the Second Circuit ultimately rules in this case.