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California Court of Appeal Provides Roadmap on the Proper Classification of Independent Contractors

Seyfarth Shaw (01/05/12) Ortman, Tripper; McFadden, Robb

The California Court of Appeal recently held in Arnold v. Mutual of Omaha Insurance Company that insurance agents and other types of salespeople with the discretion to determine when, how, and whether to sell a company’s products may properly be classified as independent contractors. A lower court had previously applied the common law test for independent contractor/employee status set forth in S. G. Borello & Sons, Inc. v. Dept. of Industrial Rel. and found that Arnold was properly classified as an “independent contractor,” and granted Mutual’s motion for summary judgment. Arnold appealed.

The Court of Appeal rejected Arnold’s argument that Division Three of the Labor Code provides a statutory definition of the term “employee.” Instead, the court agreed with the trial court and held that the common law Borello test should be used to determine whether Arnold was an employee or an independent contractor. Because the court determined that the common law Borello control test was the appropriate test to analyze employment status in California—and many jurisdictions around the country employ similar control tests—this decision should have far-reaching implications for the insurance and other industries that employ independent contractor salespeople outside California. Post-Arnold, companies that utilize independent contractors to sell their products in such states may apply the analysis in Arnold as a benchmark to assess and review these relationships in order to determine whether changes should be made.