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Freedom Of Contract Not Unlimited

This is still a free country, so long as you have your immigration papers in order. Freedom of contract is one of the central principles of American law that is even recognized in the Constitution (in a kinda, sorta way). But this does not mean that you can put any damn thing into a contract and expect to be able to enforce it.

We’ve touched on this theme before, but a recent Ninth Circuit decision underscores the point. In Narayan v. EGL, Inc. three guys in California who drove delivery trucks for EGL, a Texas based company, sued for overtime compensation, reimbursement of business expenses, and other obligations California law says employers have to pay. EGL stiff-armed the drivers by pointing out that the contracts the guys signed said they were independent contractors, not employees. The contracts also said that Texas law governed their relationship.

somalia-pirates.preview.jpgAmazingly enough, the trial judge – apparently another platinum level member of the Adam Smith fan club — accepted EGL’s position. He ruled that Texas law applied and shackled the drivers with the distainful servitude of being mere independent contractors.

The Ninth Circuit reversed on appeal, as well it should have. The Nines said that Texas law applied only to claims arising out of the contract itself, not ones based on statutes. Since the drivers’ claim did not depend on interpreting any contract provision or even require a contract to exist, the appeals court said the provisions of Texas law didn’t matter. California law was what was important, and under California law it was a question of fact whether the drivers were actually employees or independent contractors.

(At the start of the opinion, I was thinking the Court of Appeals was going to get into a nuanced discussion of the exotic choice of laws notion, renvoi. Alas, the court skipped the discussion whilst going straight for a renvoi result.)

So EGL is going to face a jury on the drivers’ claims. And while it’s understandable that EGL would take a flyer on putting these clauses into its contracts, you have to wonder about why it pushed things so far. I mean, regardless of what the contract says, you can’t really expect to avoid applying California labor law to folks working for a living in California, now can you? If EGL’s contractual sleight-of-hand had worked then you’d find Scrooge Industries Inc. and its like always electing to apply Somalia maritime law to its employment contracts, just to avoid those pesky U.S. statutes about overtime, minimum wage, child labor and such.