Narayan v. EGL: Contracts Can’t Circumvent California Wage & Hour Laws

The Ninth Circuit U.S. Court of Appeals has made it clear that employers cannot contractually circumvent the California Labor Code by labeling workers “independent contractors” or including an out-of-state choice of law provision. In Narayan v. EGL Inc., ___F.3d. ___, 2010 WL 3035487, No. 07-16487 (9th Cir. July 13, 2010), the Ninth Circuit rejected a Texas employer’s claim that it did not have to comply with California wage and hour laws regarding its California-based workers because those workers were independent contractors whose contracts included a Texas choice-of-law provision. The Court held that Texas law would only apply to interpretation of contract terms, not to extra-contractual statutory claims, which would be decided under state law. The opinion confirms the pro-employee strength of California’s Labor Laws and sends a caution flag to any employer who seeks to circumvent California’s laws with hollow contract terms.

BACKGROUND

EGL, the employer, is a global transportation, supply chain management, and information services company incorporated and headquartered in Texas. The company employs drivers all over the world as part of its freight pick-up and delivery services—the plaintiffs were three such drivers based and serving the company in California.

The driver plaintiffs had signed agreements with EGL for “Leased Equipment and Independent Contractor Services” (the “Agreements”), providing that the parties were intending to create an independent contractor relationship, not an employer-employee relationship, between the drivers and EGL. The contract also included a Texas choice-of-law provision. The plaintiffs were paid on a per-delivery basis, without receiving any of the overtime or other benefits required to be provided to employees under California law.

The plaintiffs sued EGL in the U.S. District Court for the Northern District of California, contending that they were in fact employees under California law and that EGL had violated California’s wage and hour laws. The plaintiffs sought back pay, statutory penalties, and attorney fees. EGL filed a motion for summary judgment, arguing that under the terms of the Agreements, the plaintiffs were independent contractors and the contracts had to be interpreted under Texas law.

The District Court granted EGL’s motion for summary judgment and the plaintiffs appealed the case to the Ninth Circuit. Narayan v. EGL Inc., ___F.3d. ___, 2010 WL 3035487, No. 07-16487 (9th Cir. July 13, 2010).

An Employer Cannot Contractually Circumvent California’s Labor Laws

The Ninth Circuit Court reversed the District Court’s grant of summary judgment. As to the choice-of-law provision, the Circuit Court held that the Texas choice-of-law provision only applied to the terms of the contract itself, not to noncontractual disputes that arose under statutes or common law principles. Even under Texas law, this is the way choice-of-law provisions are applied. 2010 WL 3035487, *3. The Court stated: “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.’” Id.

The Court then turned to the question of whether the plaintiffs were independent contractors, pursuant to the Agreements, or were employees under California law. California employs a shifting burden of proof for the independent contractor-employee analysis that makes it very easy for the plaintiff who claims to be an employee to establish a prima facie case – the plaintiff merely need come forward with evidence that he has provided services for the employer. Robinson v. George, 105 P.2d 914, 916 (Cal. 1940) (“The rule… is that the fact that one is performing work and labor for another is prima facie evidence of employment and such person is presumed to be a servant in the absence of evidence to the contrary.”) Once the plaintiff meets this standard, the burden shifts to the employer to prove, if possible, that the presumed employee was an independent contractor. 2010 WL 3035487, at *4.

In Narayan, the plaintiffs were clearly able to establish that they performed work for EGL. Id. EGL controlled the drivers’ schedules, disciplined the drivers if they showed up late for work, required them to wear company-branded shirts and boots, required them to mark their trucks and vans with the EGL logo, gave them company forms to use to conduct company business, etc.  In other words, the plaintiffs were able to establish a prima facie case. So the burden shifted to EGL to prove that the drivers were independent contractors.

The Court discussed the employment test in California, saying: “The Supreme Court of California has enumerated a number of indicia of an employment relationship, the most important of which is the ‘right to discharge at will, without cause.’” Id. (citations omitted). The Court then listed the many factors that the California Supreme Court enumerated for consideration when determining the question of whether a worker is an employee or independent contractor. Id. at *4-*5.

While application of these factors to the current case tended to indicate that the drivers were employees, not independent contractors, under California law, the Court made a broader point that factual analysis of multi-factor tests do not lend itself to summary judgment. Id. at *5.  The Court quoted Judge Easterbrook a couple of times in the opinion, including for the proposition that “(i)f we are to have multiple factors, we should also have a trial. A fact-bound approach calling for the balancing of incommensurables, an approach in which no ascertainable legal rule determines a unique outcome, is one in which the trier of fact plays the principal part. That there is a legal overlay to the factual question does not affect the rule of the trier of fact.” Id. (citing Sec’y of Labor v. Lauritzen, 835 F.2d 1529, 1542 (7th Cir. 1987). Accordingly, the lower court should not have granted summary judgment, and the Circuit Court reversed.

CONCLUSION

The weighty impact of Narayan will be felt by every employer who utilizes independent contractors in California. The Narayan case makes clear several salient points that employers must soberly consider: 1) merely labeling a California worker an “independent contractor” in an agreement will not in itself avoid application of California Labor Laws; 2) inclusion of a choice-of-law provision attempting to construe an independent contractor contract under the law of another state will not enable an employer to circumvent California Labor Laws; and 3) very few independent contractor/employee questions can be resolved on summary judgment.

Any business that uses California independent contractors should consult with competent employment counsel to ensure that those labels are appropriately applied and policies are in place to protect a business in the event of a wage and hour challenge, especially in this era of increased scrutiny on the “independent contractor” label. While the financial allure of labeling workers as independent contractors is tempting, businesses must be practical – when in doubt, or in the case of close calls, it is probably prudent to classify the worker as an employee and comply with the applicable labor laws.

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Jeremy J. Gray

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