Ninth Circuit Avoids Employer’s Choice-of-Law Provision With Creative Reasoning

Third Quarter 2010Newsletters California Update Employment Law

The first sentence of the Ninth Circuit's opinion in Narayan v. EGL, Inc. (filed July 13, 2010) explains what is at stake: "The California Labor Code confers certain benefits on employees that it does not afford independent contractors." Indeed. At issue in Narayan was whether certain individuals "engaged to provide freight pick-up and delivery services for [Defendant] EGL in California" were classified properly as independent contractors. In support of a finding that no employment relationship existed, EGL argued that the issue was controlled by its "Leased Equipment and Independent Contractor Services Agreement," which provided that the "intention of the parties" is to "create a vendor/vendee relationship" and that "[n]either Contractor nor any of its employees or agents shall be considered to be employees of " EGL. The parties also designated that Texas law should control.

But these provisions delayed the court not at all. Rather, the court limited the choice of law provision to claims that "rise or fall on the interpretation and enforcement of any contractual provision." Such provisions do not "encompass all disputes between the parties." And here, says the court, "[t]he Drivers' claims involve entitlement to benefits under the California Labor Code. Whether the Drivers are entitled to those benefits depends on whether they are employees of EGL, which in turn depends on the definition that the otherwise governing law—not the parties—gives to the term 'employee.'" Nice trick! Using this reasoning, the court simply ignored Texas law and held that California law applies. But this reasoning seems shallow. Whether an individual is an employee is a question of law. And here the parties agreed to answer that question using Texas law. The court's analysis merely assumed what it should have proven—i.e., that the California Labor codes applies in the first instance. Individuals cannot make claims under the Labor Code unless they are employees.

As an added bonus to employees, the court also emphasized the burdens that exist in litigation under the Labor Code. This topic is not heavily litigated but can be a very effective tool in avoiding summary judgment. Those principles are as follows:

  • Under California law, once a plaintiff comes forward with evidence that he provided services for another, the plaintiff has established a prima facie case the relationship was one of employer/employee.
  • The fact that one is performing work and labor for another is prima facie evidence of employment, and such person is presumed to be an employee in the absence of evidence to the contrary.
  • Once the employee establishes a prima facie case, the burden shifts to the employer, which may prove, if it can, that the presumed employee was an independent contractor.
  • The ultimate burden of proof is on the party attacking the employment relationship.

Having avoided Texas law and having emphasized the various burdens of persuasion, it is not a surprise that the court reversed the lower court's decision to award the employer summary judgment.