Employment Law Watch : Employment & Labor Lawyer & Attorney : Reed Smith Law Firm

Last month, California Governor Jerry Brown approved a variety of state legislation affecting employers doing business in California. Discussed here is SB 459, which imposes strict penalties for employers found willfully (intentionally and voluntarily) to have misclassified workers as independent contractors. Known to some as the "Job Killer Act," SB 459 provides for stiff fines, joint and several liability for third parties advising as to intentional misclassification, and a "scarlet letter" provision requiring employers who are found willfully to have misclassified their workers to post public notice of the violation for a year. The Act adds new Labor Code sections 226.8 and 2753, effective January 1, 2012.

Inadvertently included in our summary last month of the Act's provisions was a burdensome recordkeeping and notice requirement that appeared in pre-signed versions of the Act. We are pleased to report, however, that this burdensome requirement did not survive and is not part of the new Act. Following are notable provisions of the signed Act, with the stricken provision deleted:

1. Fines of $5,000 - $10,000 for the first violation, and up to $25,000 for repeat violations;
2. Prohibition on charging workers a fee or deducting anything from workers' payments had the fee or deduction been prohibited to be taken from an employee's pay (such as for goods, materials, space rental, services, licenses, repairs and maintenance);
3. Notice and recordkeeping, using a state-created form, requiring the principal to factually justify independent contractor classification for each worker so classified, and advising the worker of the tax ramifications of the classification and of his/her rights to challenge the classification;
4. Joint and several liability for any person who knowingly advises an employer to misclassify a worker as an independent contractor (employer's agents and legal counsel are exempt); and
5. A "scarlet letter" provision requiring employers who are found willfully to have misclassified their workers to post public notice of the violation.

Because the new law provides no guidance on how to review worker classification to ensure compliance, employers will be required to apply the fact-intensive tests in California case law and announced by the Employment Development Department. Adding to the challenge, federal and California classification standards vary to some degree.

The new law continues the push begun by the federal Internal Revenue Service, the California Employment Development Department, and other states' taxing authorities to microscope worker classification and impose significant penalties for companies guilty of misclassifying at the federal and state level. Particularly in this era of cash-strapped governments seeking added revenue, companies using independent contractors in California need to make certain they pass all legal tests.

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Tracking the trend of increased federal and state focus on the misclassification of workers, the U.S. Court of Appeals for the Ninth Circuit recently applied California law to hold that plaintiffs were entitled to a trial on the merits against their former employer for improperly classifying its California drivers as independent contractors, notwithstanding that the drivers had all signed independent contractor agreements that provided that Texas law controlled.  Narayan v. EGL, Inc., Case No. 07-16487 (9th Cir. July 13, 2010).

EGL - an international transportation, supply chain management, and information services company headquartered in Texas - retained drivers to pick up and deliver freight in California, classifying them as independent contractors rather than as employees.  EGL required each driver to sign a "Leased Equipment and Independent Contractor Services" agreement that, among other things, referred to the driver as a "Contractor," provided that the parties intended to "create a vendor/vendee relationship," and in which each driver acknowledged that neither the "Contractor nor any of its employees or agents shall be considered to be employees of" EGL.  The agreements also contained a provision requiring that they be interpreted under Texas law.

Several California drivers sued EGL, claiming that they had been misclassified as independent contractors, and demanding damages for unpaid overtime wages, business expenses, missed meal breaks, unlawful deductions from wages, and other relief under the California Labor Code.  Applying Texas law per the agreement, the district court found that the drivers were independent contractors and granted summary judgment in favor of EGL.

The Ninth Circuit reversed.  As a starting point, the court refused to apply Texas law to the dispute.  Noting that the drivers sought entitlement to employment benefits under California's Labor Code and that state's statutory and regulatory scheme, the court held that it was not required to interpret the agreements to decide the case.  The court instead found that California law should apply to determine whether EGL could be liable for violating the California Labor Code.

Turning to the merits of the case, the Ninth Circuit again disagreed with the district court, finding that the drivers had established a prima facie case that they were employees rather than independent contractors.  The appellate court applied California's multifactor test in analyzing whether the drivers worked as employees or independent contractors, citing, among others, the following facts as supporting the drivers' claim that they were employees:

• The delivery services provided by the drivers were integral to the regular business operations of EGL
• EGL's Safety and Compliance Manual and Driver's Handbook instructed the drivers on how to conduct themselves
• The drivers were ordered to report to the EGL station at a set time each morning
• EGL controlled other aspects of the details of the drivers' performance, such as requiring that they wear EGL-branded shirts, safety boots, and EGL identification cards
• EGL supplied branded equipment, such as boxes and packing tape
• The agreement provided for automatic renewal clauses and could be terminated on 30 days' notice, which was a substantial indicator of an at-will employment relationship
• The drivers' occupation did not require a high level of skill
• The indefinite and lengthy duration of the drivers' relationship with EGL (some of whom had worked for EGL for several years)

The court noted that in light of these facts, the drivers' acknowledgment that they were independent contractors was not significant under California law.

In reaching its conclusion, the Ninth Circuit found that once a plaintiff presents evidence that he provided services for the "employer," the plaintiff is presumed to be an employee unless the employer can prove that the individual was in fact an independent contractor.

In light of this case, and the continuing scrutiny by federal and state agencies on the misclassification of workers as independent contractors, companies should audit and analyze their independent contractor agreements with vendors, owner-operators, or contractors, as well as the practices of its contractors, to determine whether the relationship is truly one of independence.  Where there are any questions or concerns about possible misclassification,  experienced employment counsel should be consulted to determine how best to address the situation before any company is forced to defend time-consuming and expensive litigation.

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