Employee or Independent Contractor –
The Consequences of Misclassification

By Ralph Kokka

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A recent appellate court ruling should give pause to companies doing business in California as to whether they have appropriately classified a service provider as an independent contractor.Global logistics firm EGL Inc. had classified its truck drivers as independent contractors. The truck drivers had brought a class action — Narayan v. EGL Inc. — alleging that they were in fact employees rather than independent contractors.

The company had required the truckers to sign agreements, governed by Texas law, in which they acknowledged that they were independent contractors. Under Texas law, such acknowledgements of independent contractor status are enforceable.

A lower court issued a summary judgment in favor of EGL but the Ninth Circuit Court of Appeal disagreed. The Ninth Circuit ruled that the agreement’s Texas choice of law provision did not govern the issue of whether the drivers were independent contractors because the issue was one of state law, not contract interpretation.

The Ninth Circuit noted that California’s multi-faceted test for determining whether a service provider is an independent contractor would apply. The court further noted that because the test could not be applied mechanically, but must be considered as a whole, and differing inferences could be drawn in applying the test, a determination of independent contractor status could not be made as a matter of law.

In particular, the Ninth Circuit found the fact that the drivers had acknowledged in their agreements that they were independent contractors to be not dispositive of the issue. Instead, the court focused on a variety of other factors such as the amount of control the company exercised over its drivers and whether the drivers performed an essential part of the company’s business.

The lesson to be learned from the case of Narayan v. EGL Inc. is that substance matters. Simply calling a service provider an independent contractor or having that person contractually acknowledge such status does not make that person an independent contractor.

Moreover, invoking the law of a jurisdiction with favorable laws, such as Texas, will be ignored by the court, if the service provider was in fact performing services in California. Instead, companies should focus on whether the service provider in the role envisioned by the company actually qualifies as an independent contractor under California’s multifaceted test.

In certain cases, the company may be able to structure the relationship to insure that the service provider is an independent contractor. If you would like to learn more about the proper classification of your service providers, please contact Ralph Kokka at Patton & Sullivan at 925-600-1800.

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Ralph Kokka, an attorney with Patton & Sullivan LLC, specializes in business law and estate planning.

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