Labor Employment Law Blog

By Thomas Kaufman; (follow me on Twitter)

A First Appellate District decision from May 31, 2012, Sotelo v. Medianews Group, Inc.; was published yesterday.  The opinion contains an in-depth discussion on class action concepts arising out of a case alleging misclassification of newspaper carriers as independent contractors.  The opinion cuts back on some pro-certification precedents, sets forth some anti-certification law for independent contractor cases, and contains some interesting observations about class certification in general.

On September 8, 2011, the California legislature passed Senate Bill 459 prohibiting the willful misclassification of individuals as independent contractors. Labeled by some as the "Job Killer Act," this new legislation creates civil penalties of between $5,000 and $25,000 per violation. In addition to making it illegal to willfully misclassify individuals as independent contractors, the new law will also prohibit charging fees to or making deductions from the compensation paid to those misclassified workers. Although still requiring Governor Jerry Brown's signature, it is anticipated that this legislation will become law within 30 days.

In the seminal case Armendariz v. Foundation Health Psychcare, the Supreme Court of California established the standard for determining the enforceability of mandatory arbitration agreements for employees. Armendariz generally held that mandatory arbitration agreements were enforceable if they were mutual and did not "serve as a vehicle for the waiver of statutory rights." Armendariz set forth a number of minimum requirements that must be met for a mandatory employment arbitration agreement to be valid, including requiring a neutral arbitrator, providing for sufficient discovery, requiring a written decision adequate enough to allow judicial review, allowing for all remedies available in a judicial action, and not requiring the employee to pay unreasonable costs or fees. In the recent case Wherry v. Award, Inc., the Fourth Appellate District extended the Armendariz standard beyond the employment relationship and applied the same standard to mandatory arbitration agreements for independent contractors.

In Narayan v. EGL, Inc., the employer, EGL, Inc. (“EGL”), is a global transportation company that provides “air and ocean freight forwarding, customs brokerage, [and] local pickup and delivery service.” EGL is incorporated and headquartered in Texas, but it operates through a network of over 400 facilities in 100 countries. The case was brought by three drivers who were engaged to provide freight pick-up and delivery services for EGL in California. All three drivers had entered into “Leased Equipment and Independent Contractor Services Agreements” (the “Agreements”) with EGL that were employer-drafted pre-printed form contracts. The Agreements contained acknowledgments by the drivers that they were independent contractors and choice-of-law clauses providing that the Agreements shall be interpreted in accordance with Texas law.

On November 19, 2009, the Ninth Circuit handed down its opinion in Fleming v. Yuma Regional Medical Center, 07-16427. The court faced the difficult task of interpreting the interplay between Section 504 of the Rehabilitation Act (29 U.S.C. § 794) and Title I of the Americans with Disabilities Act. The Sixth and Eighth Circuits had previously held that the Rehabilitation Act incorporated Title I in its entirety, requiring an employer-employee relationship as a prerequisite to suing for discrimination. On the other hand, the Tenth Circuit had disagreed, and only incorporated the "standards" of Title I, allowing independent contractors to sue even without an employment relationship. In Fleming, the Ninth Circuit agreed with the Tenth Circuit, and held that the Rehabilitation Act would indeed cover claims by an independent contractor notwithstanding the lack of an employer-employee relationship.

On September 15, 2008, a California Court of Appeal decided the case of Varisco v. Gateway Science and Engineering, Inc., holding that - where all other indicators point to a valid independent contractor relationship - a single clause in a contract allowing either party to terminate the relationship "at will" does not transform it into an employment relationship.

The existence of an employer-employee relationship is a necessary precursor to wage and hour protection under California law.  With its recent decision in NLRB v. E. Bay Taxi Drivers Ass'n et al., the Ninth Circuit reminded employers that they cannot simply avoid their wage and hour obligations by self-anointing individuals as "independent contractors" despite the economic realities of the relationship.

In a suit filed by Air Couriers International ("Sonic") against the Employment Development Department ("EDD"), to recover employment taxes paid for drivers who operated as independent contractors, the California Court of Appeal rejected Sonic's claim that the drivers were independent contractors and instead found that the drivers acted as Sonic's employees.

by Greg S. Labate

Employers often unintentionally misclassify workers as independent contractors when they should really be employees. This common error can lead to serious consequences, including audits, lawsuits, and liability. Accordingly, all employers should conduct a careful review of their independent contractor relationships to determine if they are valid and proper.