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The Ninth Circuit Rejects Form Over Substance Claim Of Independent Contractor

January 22, 2012

I.Justine Grubb, Esq.

With the Ninth Circuit’s decision in Narayan v. EGL, Inc. on July 13, 2010, California Courts have held employers’ attempts to contract around the California Labor Code invalid. In Narayan, the Court rejected the employer’s argument that it contractually hired truck drivers as independent contractors who were, therefore, not within the ambit of the California Labor Code for purposes of overtime, wages and business expenses.

The case involved a suit by aggrieved drivers regarding the scope of their employment with EGL, Inc., a global transportation service. The drivers admittedly signed a contract with EGL, Inc. stating that the intention of the contract was to create an independent contracting relationship between EGL, Inc. and the individual drivers. The drivers later sued for money damages, contending they were due unpaid overtime wages, business expenses, meal compensation, unlawful deductions from wages and statutory penalties under the California Labor Code. The district court initially held that the law of Texas applied, based on a choice-of-law provision in the Independent Contractors’ contract. However, the Ninth Circuit held that the choice-of-law provision only applied to the “interpretation and enforcement of the contract.” Since the claimants were seeking an evaluation of benefits under the California Labor Code, it would be improper to apply Texas law to a California regulatory scheme. The Court also noted that the drivers were all residents of California and performed work in California.

In their summary judgment motion, the employer pointed to the independent contractors’ contract as evidence that the drivers were not entitled to the protections and benefits provided under the California Labor Code. In rejecting the employer’s attempt to contract around the California Labor Code, the Ninth Circuit did not place any significance on the parties’ attempt to define the relationship in the independent contractor contract. Instead, the Court looked to a multitude of factors in evaluating whether the relationship was that of employee-employer or vendee-vendor.

The Court reiterated it would look to the following factors in evaluating the type of employment relationship created between the parties:

* Whether the party performing services is engaged in a distinct occupation or business;
* The kind of occupation and whether the work is usually done by a specialist;
* The skill required;
* Whether the principal supplies the tools and instrumentalities;
* Length of time for the service contract;
* Method of payment: by time or by job;
* Whether the work is part of the regular business of the principal;
* Whether the parties believe they are creating an employer-employee relationship;
* The individual’s opportunity for profit or loss;
* The investment in equipment or materials required for task, or employment of helpers; and The degree of permanence of the working relationship.

The Court also cited to the provisions of the California Labor Code § 2750.50 with approval. Under that code section, the Courts look to: the control and discretion of the individual; whether the business is customarily an independent business; and whether the independent contractor status is bona fide.

The Court expressed the need to balance the factors, listed above. The Court then determined that the drivers’ transporting was within the scope of the services performed by ECL, Inc.; the services did not require special skill or certification; the contracts were not for a finite period of time, but instead automatically renewed, thus essentially creating an at-will employment; and that the details of the drivers’ actions were governed by substantial ECL, Inc. policies and procedures. Although the Court noted the drivers owned their own trucks, and were, in theory, able to perform independent contracting for other companies, the trucks were required to be new, painted white, and to bear the ECL, Inc. logo. These restrictions essentially made it impossible for the drivers to work for any other companies at the same time as for ECL, Inc. These factors involved questions of fact, namely: whether the drivers were independent contractors or employees. This question of fact required the Court to reverse the granting of ECL, Inc.’s motion for summary judgment.

The Ninth Circuit suggested, under the proper circumstances, to look at the classifications given to the individuals by the Internal Revenue Service or the Employment Development Department of California.

By: I. Justine Grubb, Esq.

Cochran, Davis & Associates, P.C.

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