Many businesses utilize independent contractors as part of their daily operations. Contractors are often favored by businesses over full time employees, because they allow for flexibility in retention and scheduling, are not entitled to government-mandated benefits such as workers' compensation, and are typically not offered costly benefits such as health insurance. A problem often arises, however, when the business seeks to take advantage of these positive aspects of the relationship, yet also wants to control how the contractor performs his duties.
Recently, the federal Ninth Circuit Court of Appeals addressed alleged misclassification of employees as independent contractors. In Narayan v. EGL Inc., No. 07-16487 (July 13, 2010), the plaintiffs were California-based drivers for a freight delivery service, Eagle Freight Systems, Inc. (EGL). They had signed an agreement that indicated they were independent contractors. The agreement designated Texas law as the law to be applied in any dispute over the agreement's terms. The drivers subsequently sued EGL, alleging that they were in fact employees, and sought damages under California law for overtime, expenses, and meal break compensation, among other things. Ruling that the matter was governed by Texas law, the district court granted EGL's motion for summary judgment. On appeal, the Ninth Circuit reversed.
The Ninth Circuit first determined that California law applied, because the dispute involved benefits provided under the California Labor Code, not the agreement. The Court then reviewed the relationship between the drivers and EGL. In California, a worker can establish a prima facie case of employment by demonstrating that the worker provided services for the employer. The burden then shifts to the employer to prove that the worker was in fact an independent contractor by overcoming the multi-factor test adopted by the California Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341.
Applying the "Borello" test, the Ninth Circuit determined that EGL exercised considerable control over the drivers, and thus, that an employer-employee relationship existed. The factors the court considered included the following: the drivers were subject to disciplinary action; EGL regulated their appearance; they drove exclusively for EGL and affixed its logo to their trucks; they communicated directly with EGL dispatchers; and they used EGL equipment. Most significantly, the drivers worked at EGL for several years, and their agreements were automatically renewed. Their relationship with EGL continued automatically, and could be terminated by either party upon thirty days notice.
California businesses that retain independent contractors should carefully review their contractor relationships. Among other things, they should examine the extent to which they seek to direct the work of contractors; the degree of permanence of the relationship; which party provides office space, business cards, marketing materials, tools, and equipment; whether training is provided by the business; whether performance reviews and discipline are issued; whether the contractor is engaged in a distinct occupation or business; the amount of skill required for the work; how the worker is paid (e.g., by the job or hourly); and the intent of the parties. The recent Narayan decision is a reminder of the pitfalls that await unwary employers regarding independent contractors.
