In a recent case, Narayan v. EGL, Inc. (9th Cir., July 30, 2010), the court considered an interesting issue: can an out-of-state employer get around the California labor laws by making its California workers (drivers) sign independent contractor agreement and thus properly classify them as contractors, rather than employees. To make their case very compelling, the employer also included a choice of law clause in the agreement, stating that any disputes arising out of the signed contract should be decided in the employer's home state - Texas. 

The Ninth Circuit made a critical holding: because Texas law did not apply to claims outside the signed contract, and because the claimed misclassification of employees as contractors is based on California labor code, the employer cannot get around the California statutes by agreeing with its employees on terms that violate those statutes. In other words, if the workers were deemed to be employees under California law, the fact that they signed an agreement that they will only bring claims against the employer in some other state outside of California, doesn't deprive them of the rights protected by California labor code, if they are employed on the territory of this state. 

Thus, the class of misclassified drivers were allowed to proceed forward with their class action against the employer.
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In recent years, it has become increasingly popular for businesses to use the services of independent contractors for both short and long-term projects rather than to hire new career employees. Business can retain the services of independent contractors directly, or through a temporary employment agency. 

The potential advantages of suing independent contractors include:
1. Cost savings from mandated contributions. The employer does not have to pay the usual employer contributions - state unemployment tax, social security tax or federal unemployment tax.
2. Cost savings from discretionary fringe benefits. The employer does not have to provide the independent contractor the employee benefits such as medical or life insurance, vacation leave, sick time and pregnancy leave, or retirement plan participation. 
3. Minimizing potential liability in workplace. Businesses are generally not liable for injuries incurred by independent contractors of by employees of independent contractors. 4. The employer can choose whether to provide workers compensation insurance. The risk of discrimination claims by independent contractors is also significantly lower because most anti-discrimination statutes protect employees only.
5. The employer may use an independent contractor for individual projects without incurring liability for unlawful employment termination suits of unemployment claims. Employer usually also save administrative time and costs by paying independent contractors on a gross basis and not setting up a payroll system.  

The potential disadvantages in using independent contractors:
1. The employer has less control over how the contractor performs the services.
2. The employer cannot unilaterally terminate the working relationship with the independent contractor without risking liability for breach of contract. It might be easier to terminate an employee, especially if he/she is an at-will worker.
3. The employer may have no ongoing relationship with the contractor. 
4. The employer bears the risk of misclassification. It is very important to recognize that whether the workers is an employee or an independent contractors dependends on the specific circumstances of his employment and not on how he is formally classified. Thus, calling someone an "independent contractor" doesn't create the contractor status. The key element to determining the worker's status is the degree of control that the employer exercises over the worker's work, schedule, etc. Misclassification of a workers may lead to serious penalties and liability for civil damages if the workers is not provided with certain benefits because he was erroneously classified as an independent contractor.


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The employee / independent contractor distinction at workplace is very important. Whether you are classified as employee or an independent contractor is very important to determine - it will affect your eligibility for benefits, the calculation of your taxes, your rights upon termination and your ability to recover from your employer / principal for injuries sustained at work and for their unlawful conduct.

Interestingly enough, employee/contractor distinction is also one of the most commonly misunderstood legal concepts in a workforce. Specifically, the majority of workers believe that just because they sign a contract that verbally states that they are independent contractors, it means that they indeed are and that they have no rights that the employees of the company enjoy.

Courts have been continuously rejecting this “literal” approach for many years. While a written agreement between the hiring body and the workers is one factor in determining the worker’s status, it’s is in no way dispositive in that determination.

Although no absolutely clear test has been established for determining whether a worker is a contractor or an employee, the key factor seems to pervade the vast majority of the California courts’ holdings on this issue: whether a worker is an employee or an independent contractor depends on the degree of control that his/her superior / manager exercises over his/her work. The examples of such control include the following: setting specific work hours and creating a designated work area for a workers, close review and supervision of his work. If an employer exercises actual control over the work, or if the parties understood that the employer could exercise control, the worker is more likely an employee and not an independent contractor.

Further, there has been a clear legislative trend over the past decades to provide employees greater protection from being abusively classified as an independent contractor. Recent court decisions look beyond an employer’s supervisory control to consider the economic context of the working relationship and the purpose of the relevant legislative scheme.

Thus, when the degree of control over the work of a particular person is unclear, consideration of other factors is permitted, such as the parties’ comparative investment in tools and equipment and the worker’s opportunity for profit or loss. Arkady Itkin, Esq.


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