Ninth Circuit Rejects Employer's Effort to Apply Another State's Law to Treat California Workers as Independent Contractors

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.

Plaintiffs' Attorneys Targeting Health Care Facilities in Wage and Hour Lawsuits

This post was written by John A. DiNome, Remy Kessler, Joel S. Barras and Marytza J. Reyes.

A series of wage and hour collective actions initially filed in New York and Pennsylvania have begun to swell across the country. Plaintiffs’ attorneys are targeting health care facilities over their alleged failure to comply with meal break rules. Specifically, such suits claim that employers have automatically deducted 30 to 60 minutes of time for employees’ meal periods, even if employees never took the breaks. The plaintiffs allege that by failing to provide unpaid meal periods free of interruptions from work, or by failing to fully compensate the employees for the time they were not relieved of duty, health care facilities have violated the Fair Labor Standards Act (“FLSA”) and other laws. Because employees can recover for violations that took place as many as three years before suit is filed, damages in these cases can be substantial. Employers may be liable for double the employees’ overtime rate of pay for the unpaid meal breaks that were improperly deducted. In addition, plaintiffs are entitled to recover their attorneys’ fees and costs, which often exceed the actual damages. 

Not surprisingly, the Internet has become an effective tool for plaintiffs’ lawyers seeking to identify deep-pocket defendants. Some attorneys have even gone so far as to set up websites to provide information to employees about their investigations of health care employers. (See, e.g., www.hospitalovertime.com or www.overtimecases.com.) Such websites have become an easy way for a plaintiffs’ counsel to gather information about a particular health care employer’s practices, reach employees throughout the country, and publicize large settlements in wage and hour lawsuits.

Health care facilities throughout California have experienced a recent wave of wage and hour lawsuits. In 2008, at a time when registered nurses were in high demand and hospitals across the country were struggling financially, California completed implementation of landmark legislation passed almost a decade before, mandating minimum nurse-to-patient ratios. Not surprisingly, the shortage of nurses and other medical professionals has made it increasingly difficult for employers to comply with California laws requiring them to provide employees who work more than six hours with an uninterrupted 30-minute meal period. While many nurses acknowledge that the demands of their positions do not always permit an uninterrupted meal period, they uniformly object to not being compensated when they are unable to take the breaks to which they are legally entitled. 

In addition to requiring payment of overtime when an employee works more than 40 hours per week, California law requires overtime pay when an employee works more than eight hours per day. Depending on the length of the shift, California employees who are denied meal periods may be entitled not only to overtime, but also to an additional hour of a “premium wage” for each missed meal period. California law permits employees to seek damages for meal period violations going back three years before suit is filed; but if the same allegations are brought under California’s Unfair Competition Law (Business & Professions Code Section 17200), the statute of limitations is four years.

Health care facilities with timekeeping systems that automatically deduct a predetermined period of time for an employee’s meal period must be certain that the employee has been completely relieved of duty for the entire meal period. Courts have recently struck down policies placing the responsibility on employees to seek adjustment of automatic deductions when they are unable to take a full meal break, finding that such an approach improperly shifts the burden from employers who are required to maintain accurate time records. An employer who fails to accurately record and certify all hours worked thus can face significant exposure for unpaid wages, penalties and attorneys’ fees. 

Employers should take the following steps to identify and minimize exposure to these types of lawsuits:

  • Carefully examine when and under what circumstances automatic deductions are taken for employee meal breaks. Consult your employment attorney to ensure that any automatic deductions comply with all applicable state and federal laws. Preventive audits of your existing meal period and overtime pay practices are essential to reduce or eliminate your legal risk in this area.
  • Have employees verify on a weekly or a bi-weekly basis that all meal breaks reflected on their timecards were in fact taken. If a break was not taken, require the employee to note that he or she did not receive an uninterrupted break and immediately compensate the employee for the additional hour of premium pay. 
  • Review policies to ensure that they contain no language suggesting that employees are responsible for seeking adjustment of automatic deductions if and when they are unable to take a meal break. Remember that employers have the burden of maintaining accurate time records and paying employees for all compensable time, and paying for any meal break time when the employee is not relieved of all duty. 
  • Do not necessarily rely on employees to ensure their meal periods are not interrupted or not taken. The California Supreme Court is currently considering a case that involves the issue of whether employers must require that meal breaks are taken, as opposed to merely providing their employees with the opportunity to take breaks.
  • Instruct managers and supervisors to promptly inform upper management if they learn that employees have received questionnaires or other correspondence from law firms regarding their unpaid meal periods.