WORKPLACE LAW -
Out of State Employers

Question:

Our company is headquartered out of state, but we have relationships with individuals who provide their services in California.  Do the provisions of the California Labor Code apply to our relationships with those individuals?

Answer:

As the United States Court of Appeals for the Ninth Circuit recently explained, the provisions of the California Labor Code may apply to California residents who have relationships with out of state companies.  In Narayan v. EGL, Inc., the plaintiffs were three delivery drivers who delivered shipments within California.  The defendant was a global transportation company incorporated under the laws of Texas and headquartered in Texas.  The drivers entered into “Leased Equipment and Independent Contractor Services” agreements with the transportation company.  Under those agreements, the drivers agreed that they were independent contractors and not employees of the transportation company.  In addition, the pre-printed form agreements contained a choice of law clause which stated that the “Agreement shall be interpreted under the laws of the State of Texas.”

Nonetheless, the drivers filed a lawsuit in Santa Clara County Superior Court, alleging that the transportation company violated California Labor Code provisions regarding overtime, reimbursement of business expenses, deductions from wages, and meal periods. The case was removed to the United States District Court for the Northern District of California because of the citizenship of the parties. Thereafter, the transportation company brought a motion to dismiss the case based on the provisions in the agreements. The District Court granted the motion, ruling that the agreements prevented the drivers from proceeding with their claims.

However, on appeal, the United States Court of Appeals for the Ninth Circuit disagreed, and reversed the District Court’s decision. The Court noted that the choice of law provision in the agreement only applies to the interpretation and enforcement of the contract itself and not to all disputes between the parties. As a result, the choice of law provision did not apply to the drivers’ claims based on the California Labor Code. Had the choice of law provision governed the entire relationship between the parties, the result may have been different.

As you may know, employees are entitled to the protections of the California Labor Code, while independent contractors are not. After determining that California law applied to the drivers’ claims, the Court explained the law regarding whether an individual is an independent contractor or an employee. The Court cited to the California Supreme Court’s multi-factor test, which considers:

  • the control the business has over an individual;
    whether there is the right to discharge the worker at will, without cause;
  • whether the worker is engaged in a distinct occupation or business;
  • the worker’s occupation, and whether the work is usually done under the direction of the hirer or by a specialist without supervision;
  • the skill required in the particular occupation;
    whether the hirer or the worker supplies the means, tools, and the place of work for the worker;
  • the length of time for which the services are to be performed;
  • the method of payment, whether by the time or by the job;
  • whether or not the work is part of the regular business of the hirer;
  • whether or not the parties believe they are creating the relationship of employer-employee;
  • the worker’s opportunity for profit or loss depending on his managerial skill;
  • the worker’s investment in equipment or materials required for his task, or his employment of helpers;
    whether the service rendered requires a special skill;
  • the degree of permanence of the working relationship;
  • and whether the service rendered is an integral part of the alleged employer’s business.

The Court noted that whether the drivers were employees was subject to a legitimate factual dispute based on a balancing of the factors, which the Court made clear by applying the factors to the facts of the case. For instance, while the drivers used their own trucks and vans to make the deliveries, the drivers were required to place the transportation company’s logo on their vehicles. Additionally, the drivers had the right to employ helpers to assist with deliveries, but the helpers had to be approved by the transportation company. The Court also noted that the agreement’s provision regarding the lack of an employment relationship was only one of many factors, and was not significant. In sum, the Court held that a jury would most appropriately perform a balancing of the factors.

This case should serve as a warning to out of state businesses who enter into relationships with California residents. The agreements governing such relationships should be carefully drafted with the assistance of legal counsel, and the parties should assess whether the California residents are employees or independent contractors based on the above-listed factors. In addition, this case should serve as a reminder to all employers that employee misclassification can be extremely costly. Specifically, if an individual is deemed to be an employee, the individual is entitled to the protections of the California Labor Code and the Industrial Welfare Commission Wage Orders, including those governing the minimum wage, overtime compensation, meal periods, and reimbursement for business expenses. Further, misclassification can result in serious tax, unemployment, and workers compensation problems for businesses.
- - - - - - - - - - - - - - - - - - - - - - - - - -
Back to Menu- Work Place Law 2010 Articles