In a decision reiterating important independent contractor issues for employers, the Ninth Circuit Court of Appeals last week reversed a lower court decision holding that certain delivery drivers were properly classified as independent contractors under various provisions of the California Labor Code. Narayan v. EGL, Inc., 2010 U.S. App. LEXIS 14279 (9th Cir. July 13, 2010).
At the trial court level, Judge Ronald M. Whyte of the Northern District of California concluded that the drivers, although residents of California providing delivery services in California, were independent contractors under the laws of Texas, the governing law set forth in the drivers’ “Leased Equipment and Independent Contractor Services” agreement with EGL, a nationwide provider of logistics services. In a footnote, the court further held that “[t]he result would be no different if California law governed.”
Reversing the decision, the Ninth Circuit observed that ‘[w]hether the Drivers are entitled to those benefits [under the Cal. Lab. Code] depends on whether they are employees of EGL, which in turn depends on the definition that the otherwise governing law–not the parties–gives to the term ‘employee’” (emphasis added). The Circuit Court held that the parties’ selection of Texas law to “govern” the contract applied only to disputes about interpretation of the contract (i.e, Texas contract law), not the application of employment statutes like the California Labor Code. Simply put, the Circuit Court held that the drivers’ claims under the Cal. Labor Code did not “arise” from the contract (i.e., did not call primarily for interpretation of that contract) – the contract was simply relevant evidence relating to their claims of employee status. Finally, the Court reversed Judge Whyte’s ruling that the drivers were independent contractors (even under California law) because, in the Court’s view, he “did not apply the relevant factors [for IC status] identified by the Supreme Court of California to the facts in this case.”
While the Appellate Court’s failure to recognize the choice of law clause may not be relevant to most employers, the central holding and vital takeaway is very straightforward: independent contractor status is generally narrowly construed and currently under intense scrutiny. Further some aspects of the relevant analysis vary not only from state to state but from statute to statute. Additionally, and critically, the intent of the parties as reflected by the parties’ agreement is often of little importance to an administrative agency’s or court’s analysis, as Narayan clearly demonstrates.
All employers, and especially those with multi-state operations, must focus on the propriety of their organization’s use of contractors. A more detailed analysis of this issue can be found here.