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Today in Varisco v. Gateway Science and Engineering, Inc., 166 Cal.App.4th 1099 (2008), the California Court of Appeal affirmed the trial court’s grant of summary judgment for the employer in a wrongful termination case on the ground that the plaintiff was an independent contractor, not an employee.  The presence of an at-will termination clause, the court held, does not necessarily turn a worker into an employee.

Plaintiff Al Varisco (“Varisco”) is a certified construction inspector.  Varisco entered into a letter agreement with Gateway to provide inspection services to the Los Angeles Unified School District (“LAUSD”) pursuant to defendant Gateway Science & Engineering, Inc. (“Gateway”)’s contract with LAUSD to provide certified project inspectors for ongoing construction projects.  According to Varisco’s deposition testimony, when Varisco signed the letter agreement with Gateway, he understood that he was entering into an independent contractor relationship with Gateway.  An attachment to the letter agreement between Varisco and Gateway entitled “Duties of the Inspection Contractor” provided that Varisco must perform all inspections in accordance with the applicable provisions of the California Code of Regulations and provide various reports and other documents to LAUSD.  Gateway paid Varisco an hourly rate for his services and did not provide him with any benefits, such as medical, paid sick leave or vacation, although Gateway covered the professional and general liability insurance.  Varisco was required to complete Gateway time sheets and overtime would be paid only if authorized by LAUSD.  Gateway received a 1099 for all of his compensation from Gateway.  Gateway did not provide any uniform, equipment or tools to Varisco and did not reimburse him for any travel expenses for his transportation to and from the job site.    Varisco’s work hours were established by LAUSD’s architect of record and he would address any issues or questions to the LAUSD architect.  Gateway did not have a representative at the LAUSD job site.  Varisco only went to Gateway’s offices twice a month to pick up his paycheck.    

The letter agreement between Varisco and Gateway contained an at-will termination clause providing in pertinent part: The employee or [Gateway] may terminate with or without cause and with our without notice employment At-will at any time.  Nothing in this Agreement or in any document statement shall limit the right to terminate At-Will employment.  No manager, supervisor or employee of [Gateway] has any authority to enter into an agreement for employment for any specified period of time or to make an agreement for employment for any specified period of time or to make an agreement for employment other than At-Will  terms. 

Gateway terminated its agreement with Varisco when Varisco refused to sign a new contract requiring him to pay his own car insurance and worker’s compensation insurance. 

The Court of Appeal held that the undisputed facts show that Varisco was an independent contractor because Gateway did not control, nor did it have the right to control, the “manner and means” of Varisco’s services.  Varisco’s main argument on appeal was that the at-will clause created an employment relationship.  In support of his argument, Varisco relied on Burlingham v. Gray, 22 Cal.2d 87 (1943), and Toyota Motor Sales U.S.A., Inc. v. Superior Court , 220 Cal.App.3d 864 (1990), both of which provide that the right to discharge an employee at-will is a strong factor demonstrating an employment relationship. 

The Court distinguished these two cases on the ground that substantial evidence in the cases showed that the defendant companies directed and controlled the unskilled plaintiffs’ work.  In contrast, the Court found that Varisco is a skilled professional who provided services without supervision and reported directly to LAUSD, rather than Gateway.  The Court found that an independent contractor agreement may include an at-will clause and “[s]uch a clause does not, in and of itself, change the independent contractor relationship into an employee-employer relationship.”  The Court reasoned that a contrary finding would unnecessarily limit the right of both parties to terminate the agreement. 

Although the Court correctly found that Varisco was an independent contractor under the primary right to control test, Gateway might have avoided litigation if it had been more careful with the wording of its independent contractor agreement.  Employers who engage the services of independent contractors must be careful not to use terms that state or imply that the contractor is an employee of the company.  The At-Will clause in Gateway appeared to be a standard clause that is inserted in all employment agreements and was not properly modified for Varisco’s independent contractor agreement.  Rather than stating that the company may terminate or discharge employment at any time, an independent contractor agreement should provide that the company may terminate the agreement for specified reasons.  If the company needs more flexibility, the agreement may provide for termination of the independent contractor relationship for any reason with or without cause and such at-will clause will not create an employment relationship under Varisco.  Companies should also be careful in their interactions with contractors to ensure that they do not use terms that may indicate that the contractor is an employee of the company.  The contractor’s understanding of his or her relationship with the company is an important factor in determining whether an employer-employee relationship exists.    

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