9th Circuit Applies California Law to Determine Employment Status Despite Texas Choice-of-Law Provision

In a newly issued decision, the U.S. Court of Appeals for the 9th Circuit has held that a Texas choice-of-law provision in an independent-contractor agreement with California truck drivers did not go so far as to mean that Texas law governed the determination of independent-contractor status itself. Rather, California law did. Thus, the drivers had the right to bring claims under the California Labor Code that they were misclassified and should have been treated as employees. Narayan v. EGL Inc., 9th Cir., No. 07-16487, 7/13/10

This decision is a wake-up call to companies relying on a choice-of-law provision in a contractor agreement to think through the intended scope of the provision and to be wary of relying upon it as a way to circumvent California law.

In Narayan, the 9th Circuit held that EGL Inc.—a freight pickup and delivery service headquartered in Texas and incorporated under Texas law—could not force its California drivers to dismiss claims of an employment relationship under the California Labor Code despite their signing agreements that identified them as independent contractors and required the contracts to be interpreted under Texas law.

Texas Choice-of-Law Provision Relates Only to Contract Terms

The court found that the Texas choice-of-law provision only related to the terms of the contract itself and did not cover the drivers' claims that they were denied overtime pay, expense reimbursements, and meal periods required by California law because those were statutory claims that “do not arise out of the contract, involve the interpretation of any contract terms, or otherwise require there to be a contract.”

The 9th Circuit reached this conclusion by determining, under Texas law, that a choice-of-law provision that refers only to the interpretation and enforcement of a contract applies only to the contract itself, not to noncontractual disputes that arise under statutes or common-law principles. In this instance, according to the court, "The Drivers' claims involve entitlement to benefits under the California Labor Code. Whether the Drivers are entitled to those benefits 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.'"

Applying California’s Test of Employment

Because Texas law did not apply to claims outside of the contract, the court applied California's “multi-faceted test of employment” to the EGL drivers to determine whether they were employees (not contractors) who could bring wage and hour claims. Under the test, it considered: “(1) the alleged employee's opportunity for profit or loss depending on his managerial skill; (2) the alleged employee's investment in equipment or materials required for his task, or his employment of helpers; (3) whether the service rendered requires a special skill; (4) the degree of permanence of the working relationship; and (5) whether the service rendered is an integral part of the alleged employer's business.”

The court stated that the delivery services provided by EGL's current and former drivers were an essential part of the company's regular business, that an instructional video the company provided for its drivers told them that they performed the key role in the shipping process, that a driver handbook instructed drivers on how to conduct themselves, that the drivers used company forms to conduct business, and that drivers attended meetings about company policies.

The court also found that EGL controlled driver schedules, including vacation periods, and that drivers were subject to discipline if they showed up late for work. Further, the company required them to wear EGL-branded shirts and boots, and to mark their trucks or vans with the EGL logo.

The work performed by the drivers did not require great skill, and a contract between EGL and a driver could be terminated by either party upon 30 days’ notice. In light of these considerations, the court held that the drivers produced sufficient evidence of an employment relationship to warrant a jury trial of their statutory claims against the employer.

Conclusion

The Narayan holding reminds employers that they cannot circumvent the California Labor Code by contractually classifying workers as independent contractors under the laws of another state, and that employers should consult with counsel to ensure that their policies and procedures conform to California law.

Where there is doubt as to whether the choice-of-law provision will be upheld as to all aspects of the contractor relationship, including independent-contractor status itself, employers must evaluate whether individuals are properly classified as independent contractors under the state law where the contractors are located.