(November 18, 2008) A California court of appeal has confirmed that an at-will termination clause does not necessarily distinguish a worker as an employee or independent contractor.

In the case Varisco v. Gateway Science and Engineering, Inc. 2008 Cal. App. LEXIS 1423 (2008), the court looked at the right to control, who was responsible for providing equipment, uniforms, etc. , the type of agreement the parties believed they were entering into and the skill of the work involved. The right to control how a worker performs duties under a contract is a deciding factor when determining if the worker is classified as an independent contractor or an employee. The at-will termination clause is not the only determining factor; it is one of many factors that must be weighed when classifying a worker.

Gateway provides professional services such as project management, planning and design management, inspection, and quality assurance to the construction industry. Al Varisco is a construction inspector with a Class-I Inspector certification from the California Division of the State Architect (DSA). In early 2004, when Gateway provided certified project inspectors to Los Angeles Unified School District (LAUSD), Varisco contacted Gateway looking for work. Gateway and Varisco entered into a contract for Varisco to provided “DSA Inspection Services to LAUSD (Client)” and Gateway agreed to pay Varisco an hourly rate for his work. Gateway ended this relationship 11 months later, citing Varisco’s refusal to sign a new contract because he was not getting a raise and Varisco’s failure to provide requested documents.

Varisco sued for breach of contract and claimed his rights were violated as an employee and not as an independent contractor. Varisco’s principal argument that he was an employee cited a clause in his contract that the relationship could be terminated at-will. Gateway presented the contract that specified Varisco was paid an hourly rate with “no benefits such as medical, dental, paid sick, vacation and holidays.” Gateway provided professional and general liability insurance, Varisco was required to complete Gateway time sheets for billing purposes to LAUSD, and no overtime would be provided unless authorized by LAUSD. Varisco’s duties were listed in the contract, which provided that he must perform all inspections and coordinate all testing and special inspections consistent with applicable regulations. Varisco testified that he believed he was entering into an independent contractor relationship with Gateway and that he worked on his own and not for Gateway.

Gateway paid Varisco through a Form 1099 and did not provide any uniform, apparel, equipment, material or tools to Varisco and Varisco testified that “as an independent contractor” he provided his own equipment, used his own car and was not reimbursed for mileage or gas. Varisco’s hours were established by the Architect of Record, not Gateway, and the only time Varisco had direct contact with Gateway was when he went to its offices to pick up his paycheck.

The court defined the principal issue as the right to control the manner and means of accomplishing the work and this determined whether the relationship was contractor or employee. Varisco was an inspector required to ensure the project met regulatory requirements. When problems arose, Varisco reported them to LAUSD or the Architect of Record, not Gateway. Gateway did not have a representative at the job site and did not even know the details of Varisco’s work, thus, Gateway certainly could not control Varisco’s work. Citing Borello v. DIR 48 Cal. 3d 341 (1989), the fact that Varisco engaged in skilled work, in a distinct occupation, supplied his own clothes and equipment, received no benefits and that both parties believed that an independent contractor relationship existed are also persuasive. Regardless of the parties’ ability to end the agreement at-will, Varisco was not subject to Gateway’s orders and could not be discharged for disobedience or misconduct. Such a clause in and of itself does not change the fact that Gateway did not control the delivery of Varisco’s work. When all the factors of the work relationship are considered and weighed, the court found the parties entered into an independent contractor agreement and conducted themselves accordingly.

The California Chamber of Commerce has recommended that employers:

• Review the job duties and the relationship between you and a worker carefully before making a determination that the worker is an independent contractor.
• Work closely with legal counsel to prepare independent contractor contracts, as well as written employment agreements.
• Train supervisors, managers and all hiring staff to understand the difference between independent contractors and employees. Misclassifying as a contractor a worker who really is an employee could be a costly error.

Staff Contact: Jessica Hawthorne