In Ruiz v. Affinity Logistics Corp., 2012 DJAR 1820 (9th Cir. 2012), the court struck down a Georgia choice of law provision in a written independent contractor agreement between a Georgia-based company and truck drivers based in California. The drivers sued the company in a class action for failure to pay wages and overtime, improper charges for workers’ compensation insurance, and the unfair business practice of improperly classifying employees as independent contractors. In defending the case, the company sought to apply a Georgia choice of law provision contained in the drivers’ independent contractor agreement. The district court, after applying California choice of law rules, held that the Georgia choice of law provision was enforceable. Under Georgia law, where a contract designates the relationship between the parties as principal and independent contractor, there is a presumption that the designation is correct and the employee challenging the designation bears the burned of proof. Applying this presumption at trial, the district court concluded that the plaintiff drivers failed to present sufficient evidence to rebut their independent contractor status. As a result, the drivers’ claims based on them being improperly classified as independent contractors all failed.
In its decision reversing the lower court, the Ninth Circuit ruled that the district court had failed to correctly apply California choice of law rules when it concluded that the Georgia choice of law provision was controlling. Specifically, although the district court properly concluded that the chosen state has a substantial interest or relationship to the parties (the first or threshold factor), it failed to consider two additional factors in California’s choice of law framework, i.e., “(1) whether applying Georgia’s law is contrary to a fundamental policy of California” and “(2) whether California has a materially greater interest than [Georgia] in resolution of the issue.”
In deciding that Georgia law is contrary to a fundamental policy of California, the court focused on the rule under Georgia law that the parties’ designation of the relationship as principal and independent contractor is presumed to be correct, requiring the employee to carry the burden of overcoming the presumption (i.e., proving the designation was not correct). According to the court, under California law, an employee establishes a prima facie that the relationship was employer/employee by producing evidence that he provided services to an employer. Once this occurs, the employer bears the burden to prove that the “presumed employee was an independent contractor.” Based on these differences between Georgia and California law, the court concluded that “Georgia law is contrary to a fundamental policy of California.”
The court also pointed out the remedial purpose of California’s law prohibiting the misclassification of employees as contractors and noted that tests for determining an individual’s status as employee or independent contractor are to be applied “in favor of ensuring worker protections.” Refering again to the presumption under Georgia law that a designation of principal and contractor is correct, the court held that “Georgia law directly conflicts with a fundamental California policy that seeks to protect its workers.”
Finally, the court held that California “has a materially greater interest than Georgia in the outcome of the case.” In reaching this holding, the court applied the following factors: “(1) the place of contracting; (2) the place of negotiation of the contract; (3) the place of performance; (4) the location of the subject matter of the contract; and (5) the domicile, residence, nationality, place of incorporation, and place of business of the parties.” Here, the drivers signed their contracts in California, performed all of their work in California, and lived in California. In addition, the subject matter of the work involved the delivery of goods all in California. Georgia’s only interest was that it was the location of the headquarters of the employer/principal. Weighting these factors, the court concluded that “California has a materially greater interest that Georgia in determining whether the drivers are independent contractors or employees…” For all of these reasons, the court concluded that the Georgia choice of law provision was not enforceable and that California law applies.
Ruiz demonstrates that choice of law provisions designating the laws of states other than California as controlling will be difficult to enforce in disputes with California based workers, particularly when the dispute is over rights afforded to workers’ under the Labor Code. Regardless of the Company’s state of headquarters and any choice of law provisions, employers are advised to comply with California labor and employment laws with respect to California based employees and contractors.