I've been off my game with respect to blogging, but an interesting item that just crossed my electronic desk prodded me to start back in on the pile of items and partially completed posts that I need to finish. A regular reader supplied me with a trial court brief that advances a fascinating proposition: "independent contractors" are entitled to indemnification (read: reimbursement of necessary expenses) under Labor Code section 2802 because the definition of "employee" that applies to Labor Code section 2802 encompasses what would be "independent contractors." If accepted by courts, that contention would have significant consequences for the many businesses that attempt to avoid all costs of employment by designing systems that classify groups of workers as "independent contractors" or "franchisees." Because the analysis is so thorough and so thought-provoking, I include it here (divided so that only a part appears on the front page due to length), with minimal editing:
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“‘California has a strong public policy that favors the indemnification . . . of employees by their employers for claims and liabilities resulting from the employees’ acts within the course and scope of their employment.’ [Citation.] Labor Code section 2802 codifies this policy . . . .” Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 81 Cal.Rptr.3d 282, 293, 189 P.3d 285, 295 (2008). Section 2802(a) requires that “[a]n employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties . . . . (Emphasis added.) The “obvious purpose” of section 2802 is “to protect employees from suffering expenses in direct consequence of doing their jobs.” Grissom v. Vons Companies, Inc., 1 Cal.App.4th 52, 59-60, 1 Cal.Rptr.2d 808 (1990). Section 2802 “shows a legislative intent that duty-related losses ultimately fall on the business enterprise, not on the individual employee.” Janken v. GM Hughes Electronics, 46 Cal.App.4th 55, 74, fn. 24, 53 Cal.Rptr.2d 741 (1996). Section 2802 is unwaivable. Cal. Lab. Code § 2804 (“Any contract or agreement, express or implied, made by any employee to waive the benefits of this article or any part thereof, is null and void . . . .”) And “[a]rbitration awards have been reviewed to determine whether the arbitrators complied with statutes conferring unwaivable rights. [Citations.]” Cable Connection, supra, 44 Cal.4th at 1362.
“‘[A]s a general rule, when “employee” is used in a statute without a definition, the Legislature intended to adopt the common law definition and to exclude independent contractors.’” Metropolitan Water Dist. of Southern California v. Superior Court, 32 Cal.4th 491, 500, 9 Cal.Rptr.3d 857, 84 P.3d 966 (2004). But “[w]here (as here) the term is defined by the statute, the legislature’s definition controls and the doctrine of common law employment is irrelevant.” Holmgren v. County of Los Angeles, 159 Cal.App.4th 593, 604, 71 Cal.Rptr.3d 611 (2008). Labor Code section 2750 (leading off Labor Code Division 3, Chapter 2, Article 1) defines “contract of employment,” “employer,” and “employee” – creating what are essentially statutory employees. It provides (in full): “The contract of employment is a contract by which one, who is called the employer, engages another, who is called the employee, to do something for the benefit of the employer or a third person.” Thus, for purposes of California Labor Code, Division 3, Chapter 2, “the relationship of employer and employee necessarily arises” from “a contract of employment.” Claremont C. Club v. Industrial Acc. Com., 174 Cal. 395, 397, 163 P. 209 (1917) (concerning former Cal. Civ. Code § 1965, reenacted as Lab. Code § 2750).
Through Labor Code section 2750, “at least in division 3 of the Labor Code, the Legislature has given a broader meaning to the word ‘employer’ than to ‘master,’ and, inferentially, that ‘employee’ is broader than ‘servant.’” Foxx v. Williams, 244 Cal.App.2d 223, 240, 52 Cal.Rptr. 896 (1966). “Section 2802 is located within Division 3 of the Labor Code, which is entitled ‘Employment Relations.’ (Lab.Code, § 2700.) Chapter 2, which contains section 2802, concerns the obligations of an employer . . . .” In re Work Uniform Cases, 133 Cal.App.4th 328, 334, 34 Cal.Rptr.3d 635 (2005).
Labor Code section 2750 is not alone in creating statutory or regulatory employees where the common law test would not be satisfied. Under 49 C.F.R. § 390.5, “Employee means any individual, other than an employer, who is employed by an employer and who in the course of his or her employment directly affects commercial motor vehicle safety. Such term includes a driver of a commercial motor vehicle (including an independent contractor while in the course of operating a commercial motor vehicle), a mechanic, and a freight handler. . . . .” Emphasis added; see Perry v. Harco National Insurance Company, 129 F.3d 1072, 1074 (9th Cir. 1997) (independent contractors come within 49 C.F.R. § 390.5 definition of employee).
The Estrada v. FedEx Ground Package System, Inc., 154 Cal.App.4th 1, 10-11, 64 Cal.Rptr.3d 327 (2007) court was apparently unaware of California Labor Code section 2750 – which it never mentioned – when it concluded that “[b]ecause the Labor Code does not expressly define ‘employee’ for purposes of section 2802, the common law test of employment applies. (Reynolds v. Bement (2005) 36 Cal.4th 1075, 1087, 32 Cal.Rptr.3d 483, 116 P.3d 1162.)” Still, the Estrada court found employment under Borello.
Those who provide services under a “contract of employment” have the right to indemnity under California Labor Code section 2802 whether or not they are independent. This stands in stark contrast with “[m]uch 20th-century legislation for the protection of ‘employees’” where the Legislature “has adopted the ‘independent contractor’ distinction as an express or implied limitation on coverage.” Borello, supra, 48 Cal.3d at 350; see, e.g., Cal. Lab. Code § 3357 (workers compensation) (“Any person rendering service for another, other than as an independent contractor, or unless expressly excluded herein, is presumed to be an employee.”). But Section 2802 is not “20th-century legislation,” and the Legislature has not adopted the independent contractor distinction as an express or implied limitation on coverage.
Instead, California Labor Code sections 2750 and 2802 are 19th-century legislation – enacted side-by-side as (former) Civil Code sections 1965 and 1969. The Code Commissioners’ note following former section 1965 teaches that “[t]he scope of this Chapter [containing former sections 1965 and 1969] is not confined to servants, but includes factors, brokers, carriers, agents, and all similar classes of persons. [Citations.]” 1 Annotated Civil Code section 1965 (Haymond & Burch, 1st ed. 1872), pp. 597-8; Exh. 27; 212/258. “A report of the Law Revision Commission proposing a statute that is subsequently adopted by the Legislature without change is entitled to substantial weight in ascertaining legislative purpose and intent.” Hong v. Somerset Associates, 161 Cal.App.3d 111, 115, fn. 6, 207 Cal.Rptr. 597 (1984). Indeed, former Civil Code sections 1965 and 1969 were adopted without change from the California Revision Commission’s proposal. Compare, 1 Ann. Civ. Code §§ 1965, 1969, supra, with Aetna Life Ins. Co. v. Industrial Acc. Commission, 175 Cal. 91, 92, 165 P. 15, 15 (1917) (reciting former § 1965, as enacted) and Gattuso v. Harte-Hanks Shoppers, Inc., supra, 42 Cal.4th at 562, fn. 5 (reciting former § 1969, as enacted).
Adamson v. Jarvis, 4 Bing. 66, 72, 130 Eng. Rep. 693, 695 (1827), cited in the Code Commissioners’ note following former section 1969, provides the basis for codifying indemnity rights for “factors, brokers, carriers, agents, and all similar classes of persons.” There, the plaintiff, an auctioneer, sold goods under order of the defendant, who had no right to dispose of them, and the true owner afterwards recovered against the Plaintiff. The court held the plaintiff entitled to indemnity from the defendant. Chief Justice Best explained:
It has been stated at the bar that this case is to be governed by the principles that regulate all laws of principal and agent: –Agreed: every man who employs another to do an act which the employer appears to have a right to authorise him to do undertakes to indemnify him for all such acts as would be lawful if the employer had the authority he pretends to have. A contrary doctrine would create great alarm.
Auctioneers, brokers, factors, and agents, do not take regular indemnities. These would be indeed surprised, if, having sold goods for a man and paid him the proceeds, and having suffered afterwards in an action at the suit of the true owners, they were to find themselves wrongdoers, and could not recover compensation from him who had induced them to do the wrong. (Ibid.)
Adamson v. Jarvis reveals that an auctioneer, who was pursuing an independent calling, was within the scope of the common law right to indemnification. This precedent is not mere history. It is the foundation of Labor Code section 2802. See Douglas v. Los Angeles Herald-Examiner, 50 Cal.App.3d 449, 458, 123 Cal.Rptr. 683 (1975) (quoting Adamson v. Jarvis to construe § 2802).
It is apparent, then, that California does not limit the indemnification right to relationships involving control (e.g., master and servant), but instead ties the right to service relationships, such as auctioneers, factors, brokers, carriers, and agents. That is the sort of relationship formed when “one, who is called the employer, engages another, who is called the employee, to do something for the benefit of the employer or a third person.” Cal. Lab. Code § 2750.
Consistent with the legislative history, case law demonstrates that Labor Code section 2750 does not exclude independent contractors. In Foxx v. Williams, 244 Cal.App.2d 223, 52 Cal.Rptr. 896 (1966), a record company sought to avoid California Labor Code section 2855 (also within Cal. Lab. Code, div. 3, ch. 2) which limits the length of a contract to seven years. The company’s defense was that comedian Redd “Foxx was engaged in an independent calling, and . . . section 2855 uses the word ‘employee,’ thereby excluding independent contractors from its coverage.” Id. at 239. “Dootone relie[d] upon the cases arising under the Workmen’s Compensation Act and cases applying the doctrine of respondeat superior to impose liability upon a master for the torts of his servant.” Ibid. Dootone’s independent contractor defense fell flat:
We do not think such considerations are determinative of the applicability of section 2855. The definitions of “employee” and “independent contractor” in the Workmen’s Compensation Law (Lab. Code, §§ 3350-3353) are said to be the meanings “used in this division,” i.e., division 4 of the Labor Code, not division 3 wherein section 2855 is found. The public policy which underlies the doctrine of respondeat superior is altogether distinct from the legislative policy which is expressed in section 2855. . . . . Id. at 240.
On their face, based on their history, and as applied, Labor Code sections 2750 and 2802 provide indemnity rights to those who become statutory employees by contracting “to do something for the benefit of the employer or a third person,” whether or not they are independent.
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Don't get too excited about this. While it reads like an appellate brief, it's a brief to a trial court. Nevertheless, it's an argument that could be made in a significant number of employment law class actions concerning misclassification of "independent contractors." In many of those cases the "independent contractors" could recover substantial amounts for expenses incurred at the behest of the employer.