The Ninth Circuit Court of Appeals recently rejected a Texas corporation’s argument that drivers who performed services for the company were independent contractors—and therefore not subject to the requirements of the California Labor Code—because their contracts with the company contained a Texas choice of law provision. In Narayan v. EGL, Inc., the Ninth Circuit reversed the district court’s decision to grant the company’s motion for summary judgment and instead remanded the case for trial. In so holding, the Ninth Circuit demonstrated the heavy burden imposed on companies seeking to establish an independent contractor relationship, even when the company has a written contract designating the workers as independent contractors.

Texas-based EGL, Inc. retained delivery drivers in California for its freight forwarding, custom brokerage, and pickup and delivery lines of business. The contract that these delivery drivers signed provided that the parties intended to form a vendor/vendee relationship and recited that “[n]either Contractor nor any of its employees or agents shall be considered to be employees” of EGL. The contract further stated that the drivers “shall exercise independent discretion and judgment to determine the method, manner and means of performance of its contractual obligations.” Either party could terminate the agreement on 30 days notice, but otherwise the contract was automatically renewed. The contract also provided that any dispute between the drivers and EGL was to be decided under Texas law.

Undeterred by this language, some drivers sued EGL in California, seeking to apply various California Labor Code provisions applicable to employees to obtain, among other benefits, overtime, expense reimbursement, and meal break premium pay. EGL relied on the choice of Texas law provision in its contract and argued the parties’ relationship should be construed in line with the stated intention in the contracts. The district court agreed and granted the motion for summary judgment.

On appeal, the Ninth Circuit rejected the choice of law argument. According to the Court, the drivers’ claims did not arise out of the contract, did not involve interpretation of the contract terms, or otherwise require that any contract exist at all. Instead, the drivers’ claims simply arose out of the California Labor Code. Therefore, California law governed the question of whether the drivers were employees, even though the contract said otherwise.

Applying California law, the Ninth Circuit concluded that the drivers clearly were employees, not independent contractors. Among other things, the Court stated that the company told drivers what deliveries to make and when to show up each day for work, and exercised control over their vacations as well as any passengers who might ride along with them. Further, the drivers did not appear to work for multiple clients, but rather worked exclusively for EGL. Moreover, EGL’s own manuals informed the drivers that they had “the key role in the shipping process” and were EGL’s “largest sales force” – representations that underscored their essential role in the regular business of EGL.

Although this ruling does not prevent EGL from marshalling other facts to prove its case at trial, it does demonstrate the challenges businesses face when attempting to establish an independent contractor relationship. While a strong contract remains essential, businesses must pay equal attention to the reality of the relationship they establish to be sure that independent contractors are being given the discretion and freedoms necessary to meet the law’s requirements.

This entry was written by Alison Hightower.