United States: FYI – לידיעתך

With August now concluded, and with it the unofficial end to the summer vacation season, we thought it would be useful to review two areas of law that we frequently see being relevant to our Israeli clients who have operations in the United States. The first is an employment law topic that is a common source of error, especially for overseas companies with U.S. operations. The second topic is when a contract's choice of law will be respected by the Courts.

When Can Someone Be Classified an Independent Contractor?

On a fairly routine basis, our clients from Israel approach us about bringing a new person on board, and tell us that the parties have agreed the new person will be treated as an independent contractor. The classification of a worker as an independent contractor has nothing to do with what the parties have agreed. Rather it is a factual test. It should be remembered that this is both a State law question and a Federal (United States) law question. Thus an answer for someone working in one State may not be the same answer for someone working in another State. It should also be noted that despite any indemnity language in a contract, it will likely be the company who will bear the fines and penalties associated with incorrectly classifying a worker as an independent contractor rather than an employee; not the worker.

Some States consider a fairly lengthy list of factual tests. Correctly determining the proper classification of independent contractor versus employee requires considering the various factors. No single factor is determinative and facts strongly pointing in one direction might outweigh weaker facts pointing to another. And, there is not necessarily a presumption at the outset.

However other States, most notably California (where many Israeli companies have operations) have a very rigid 3-part "A,B,C" test. Even more stringent, in States that utilize the A,B,C test, there is a presumption that the worker is to be classified as an employee. Furthermore, to overcome the presumption that a worker is an employee, each of the A,B,C tests has to be satisfied. If any one of them is not satisfied, then the presumption is not overcome and the worker would be viewed under the law as an employee, and not an independent contractor. Because of the presumption, it will be the company hiring the worker that will have the burden of proof to overcome the presumption; not the worker.

The A,B,C test is:

A. that the worker is free from control and direction over performance of the work, both under the contract and in fact; AND

B. that the service for which the worker is commissioned by the hiring entity is outside the usual course of the business of the hiring entity for which the work is performed; AND

C. that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed by the worker for the hiring entity.

In many cases, test "B" is the one that will be the most difficult to overcome. Simply stated, if the worker is doing substantially similar tasks to others in the organization who are employees, or is furthering the usual course of business of the company, then the discussion can stop right there. The person is an employee. As applicable to tech companies, if an individual person is hired to fix the office plumbing, or install signage for the office, that is clearly going to be different than the usual business of the company. But if the tech company is developing cyber-security applications, including writing code, and the worker will be writing code for those applications from his or her home during times of their choosing, even if hired on a project basis, it is quite possible the test will not be met.

Also, if a worker is doing the same tasks as they have done for others in the past, but as an employee and not part of independent activity, it could be difficult to prove that test "C" is satisfied too. Once again, only one test needs to fail, and then the worker is an employee; period. So for companies who have workers they have classified as independent contractors, it would be wise to make sure that such classifications are in fact correct.

Thanks go to SGR's employment law practice group, including Partner Patrick Cain and Counsel Theodore Dokko in our Los Angeles office for bringing this topic up in a recent SGR Legal Alert.

When Is Your Choice Of Law Not The Law That Will Govern Your Contract?

Lawyers in most jurisdictions (certainly in both Israel and the U.S.) know the importance of specifying the law that will govern the contractual relationship of the parties. More times than not, the parties are in different jurisdictions, so without specifying the governing law, it can be unclear which law applies to the contract. Other times (often many times) the choice of law is not merely for certainty, but is done for tactical reasons.

Where the parties and/or the subject matter of the contract span jurisdictions "A" and "B", there may be elements of the law in jurisdiction "A" that are unfavorable to a party, and thus part of the negotiation is for the law of jurisdiction "B" to govern (which may be more favorable to the party). Some States, like California, are notorious for having laws which are very favorable to employees, consumers, and sales representatives, and rather hostile to the businesses on the other side of the contract.

Because the vast majority of the U.S. subsidiaries of Israeli companies we see are incorporated in Delaware, there is often the desire to have contracts governed by Delaware law. Delaware places high importance on the concept of freedom of contract, and thus the freedom of contracting parties to select Delaware law as the law governing the contract.

The Delaware Court of Chancery issued an opinion on 26 August 2019 which is a reminder that it should not be automatically assumed that Delaware law will apply to a contractual dispute even if the contract specifies Delaware law. The case is Nuvasive, Inc. v. Patrick Miles, Alphatec Holdings, Inc. and Alphatec Spine, Inc.  Nuvasive is a Delaware corporation, Miles is a California resident, Alphatec Holdings is a Delaware corporation and Alphatec Spine is a California corporation. The case involved the enforceability of post-employment restrictive covenants that would be enforceable in Delaware, but not in California.

Chancellor Glasscock summarized the view of Delaware. Although Delaware fundamentally respects the rights of parties to have freedom to contract (including choice of law provisions), that freedom is not absolute. "Where the application of Delaware law would frustrate a fundamental policy of the other jurisdiction, the court must weigh the interests involved. If the other jurisdiction's interest materially outweighs that of Delaware, the [Delaware] court must apply that jurisdiction's law, notwithstanding the parties' contractual choice of law."   Chancellor Glasscock ruled that protecting former employees from post-employment restrictions which restricted the ability to freely work was a fundamental policy of the State of California, and this outweighed Delaware's policy of respecting the rights of the parties to freely agree on a contract provision having Delaware law apply, rather than California. Thus, despite the provision that Delaware law would govern the contract, and despite that all parties had agreed to the provision at the time the contract was executed, that is not how it turned out. Nuvasive found that the post-employment restrictive covenant protections it thought it had would be subjected to California law, and thus rendered unenforceable by the Delaware court, even though they would have been enforceable under Delaware law.

Choice of law provisions in a contract are often viewed as "boilerplate" or "standard" provisions and not given a great deal of attention. This case is a good reminder that the standard choice of law provision cannot automatically be relied upon, without analyzing the situation in which it is being used.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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