Independent Contractor Misclassification and Compliance News January 2026

As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we bring you the latest news stories from around the web.

Court Rules Single-Person LLCs May Still Be Employees Under FAA

The Second Circuit Court of Appeals recently issued a decision that joins other cases in which a company’s relationship with a single-person LLC or corporation was determined to be an employment relationship rather than an independent contractor relationship. In Silva v. Schmidt Baking Distribution, LLC, No. 24-2103 (2d Cir. 2025), the Second Circuit held that a distribution agreement between a bakery distributor and two single-employee corporations qualified as a “contract of employment,” meaning that the bakery distributor could not compel arbitration under the Federal Arbitration Act (FAA). The FAA states that it does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

The workers had previously worked as employees of a staffing agency, delivering baked goods for the distributor. They drove commercial trucks to the distributor’s warehouse, picked up products, and delivered them to retail outlets. After several months, the distributor required them to form their own corporations and sign distribution agreements—on behalf of these newly formed entities—that included mandatory arbitration clauses. The agreements characterized the relationship as independent contractor arrangements rather than employer-employee relationships. Despite this change in contractual structure, the plaintiffs continued performing the same delivery work as before. When they filed suit, the distributor moved to compel arbitration.

While the FAA generally favors enforcement of arbitration agreements, it excludes employment contracts with workers engaged in interstate commerce. The court examined whether the distribution agreements constituted employment contracts under the FAA. Applying a substance-over-form analysis, the court found that the actual work performed was functionally indistinguishable from traditional employment. The court emphasized several factors:

• The personal guarantees the individuals provided in the distribution agreements
• The fact that the distributor directed them to form corporations,
• The unchanged nature of their work

Based on these circumstances, the court concluded that the agreements were contracts of employment and fell within the FAA’s exception.

What This Decision Means for Other Companies Working With Independent Contractors

This case is in line with other cases in which courts considered contracts with single-person LLCs or corporations to be employment agreements. The Supreme Court of New Jersey noted that forming a single-person LLC or corporation alone was not enough to demonstrate that a worker met Part C of the ABC test—that they were “customarily engaged in an independently established trade, occupation, profession, or business.” The court said the ABC test required evidence that a person’s business was capable of surviving if the working relationship terminated.

Companies that work with independent contractors should not rely solely on the existence of a legal entity, such as a single-person LLC or corporation. They should also ensure other key elements of an independent contractor relationship are in place—for example, that the worker has multiple clients and operates free from the hiring entity’s control.

Additional Misclassification and Compliance Resources Available

For more information, check out our resources page on misclassification and compliance. If you have any questions about engagement, classification, or management of your independent workforce, MBO Partners is here to help.