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As it appeared in Law360 Employment Authority
A Connecticut federal judge agreed to send two food distributors’ misclassification suit to the Second Circuit, ruling that his decision that a Federal Arbitration Act carveout doesn’t apply to businesses might create a loophole in the arbitration world.
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A suit by workers alleging two food distribution companies misclassified them as independent contractors will head to the Second Circuit after a Connecticut federal judge decided the appeals court should weigh in on whether a Federal Arbitration Act carveout applies to businesses. (iStock.com/gesrey)
In an order Monday, U.S. District Judge Michael P. Shea granted Nathaniel Silva and Phil Rothkugel’s motion for an interlocutory appeal in their suit claiming Schmidt Baking Co. Inc. and Schmidt Baking Distribution LLC misclassified them as independent contractors.
Judge Shea said that his May decision that Section 1 of the arbitration act didn’t apply to them because the distributor agreements represented pacts between companies might undermine the exemption’s purpose. Under Section 1, seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce are exempt from arbitration.
The work Silva and Rothkugel performed “may be functionally indistinguishable from the work done in employment relationships” and the May ruling granting the companies’ bid for arbitration “creates a potential loophole that could undermine [Section] 1’s purpose,” Judge Shea said.
“Though these tensions likely fall short of creating a true ‘conflict of authority’ on the [Section] 1 issue that is presented in this case, they do make the issue ‘particularly difficult,’ and the Second Circuit could very reasonably reach a different conclusion,” Judge Shea continued.
Judge Shea ruled that Silva and Rothkugel’s misclassification suit seeking unpaid wages belonged in arbitration because the duo had created their own LLC to work for the companies and Section 1 of the arbitration act applies to humans, not businesses.
The workers challenged that rationale in June, saying the Second Circuit’s intervention was necessary to sort out whether Section 1 applies to workers whose contract is signed by an LLC and whether “reference to a specific arbitration provider constitutes clear and unmistakable delegation of arbitrability to an arbitrator.”
The companies said later in June that the appeals court should stay out of the case because Silva and Rothkugel were too late in advancing new arguments that include several factual disputes.
Judge Shea said Monday that the workers’ appeal sets forth an important issue “with substantial precedential value.”
“It is reasonable to expect that this practice will become even more common and will be litigated more frequently in the wake of my order compelling arbitration and other decisions like it” and a Second Circuit’s ruling would give an important road map for courts to follow, Judge Shea said.
The Ninth Circuit already has answered that question, for example, ruling in April that Section 1 doesn’t apply to companies. The Fourth Circuit similarly ruled in 2023 that the carveout doesn’t apply to commercial contracts between two businesses.
Sending the case to the Second Circuit will also “materially advance the ultimate termination of the litigation” even if the appeals court agrees with the May decision, Judge Shea added.
Zachary L. Rubin of Seppinni Law PLLC, who is representing Silva and Rothkugel, told Law360 on Tuesday that the workers appreciate the fact that the court “recognized the significance of the underlying legal issue.”
“As the Supreme Court has held, the term ‘contracts of employment’ in Section 1 should be construed broadly as it would have in 1925 when the FAA became law,” Rubin said.
Representatives of Schmidt Baking did not immediately respond to requests for comment Tuesday.
Silva and Rothkugel are represented by Zachary L. Rubin of Seppinni Law PLLC.
Schmidt Baking is represented by William J. Anthony, Joshua B. Waxman and Michael McIntosh of Littler Mendelson PC.
The case is Silva et al. v. Schmidt Baking Distribution LLC et al., case number 3:23-cv-01695, in the U.S. District Court for the District of Connecticut.
–Additional reporting by Abby Wargo. Editing by Roy LeBlanc.
