Earlier this month in Ruiz v. Affinity Logistics Corporation [pdf], the Ninth Circuit ruled that California’s interests and public policy superseded a choice-of-law provision stating that Georgia law would govern disputes between a company and its purported independent contractor.  While Ruiz did not involve claims of unfair competition, the opinion echoed the California court of appeal's 1998 non-compete decision in Application Group, Inc. v. Hunter Group, Inc. and reaffirmed that companies with California ties must consider the state’s unique employment laws and public policy even when crafting employment agreements and restrictive covenants for contemplated use outside California.

In Ruiz, delivery truck drivers sued under federal and California law claiming that the company they provided services to failed to pay overtime as well as vacation and severance compensation.  The defendant company asserted that the drivers, each of whom had signed independent contractor agreements, were not entitled to such pay.  Citing the Georgia choice-of-law provision in the independent contractor agreements, the company argued that the drivers could not satisfy their burden under Georgia law and overcome the presumption of independent-contractor status.  In finding that Georgia law controlled, the trial court analyzed only whether that state had a “substantial relationship to the parties or their transaction.”  The trial court concluded that a substantial relationship existed because the defendant company was incorporated in and had its principal office in Georgia.

On appeal, the Ninth Circuit agreed with the trial court’s substantial-relationship analysis but ultimately overturned the court’s ruling because it failed to consider two additional factors required under California’s choice-of-law framework.  First, the trial court did not analyze whether Georgia law conflicted with California public policy.  Second, the court failed to consider whether California had a “materially greater interest” in the case’s outcome.

With regard to the first question, the Ninth Circuit found that Georgia law was counter to California public policy for two related reasons.  To begin with, Georgia’s law, unlike California’s, presumed an independent contractor relationship existed if an agreement between the parties simply stated as much.  Further, contrary to California law, Georgia placed the burden on the purported independent contractor to overcome the presumption.

As to the second question regarding California’s interest in the matter, the Ninth Circuit looked at (1) where the parties contracted; (2) where the parties’ agreement was negotiated; (3) where the services took place; (4) the location of the subject matter of the contract; and (5) the residence, place of incorporation, and place of business of the parties.  Additionally, the Ruiz Court considered which state—California or Georgia—would “suffer greater impairment of its policies if the other state’s law is applied.”  After assessing each of the criteria, the Ninth Circuit concluded that California had a materially greater interest than Georgia in the result of the case.

Based on the direct conflict between Georgia law and California public policy as well as California’s materially greater interest in the case’s outcome, the Ninth Circuit concluded that the trial court should have disregarded the Georgia choice-of-law provision in the independent contractor agreements.  Accordingly, the Ninth Circuit overturned the trial court’s decision and sent the case back to the trial court to apply California law to determine whether the drivers were employees or independent contractors.

Like the opinion in Application Group, where the California court of appeal invalidated a non-compete provision on the grounds that it violated public policy, the Ruiz decision emphasizes that California courts will likely disregard a choice-of-law provision in a non-compete agreement when the covenanting employee resides and provides services in California.  Consequently, an employer should not expect that California courts will honor choice-of-law provisions in non-compete agreements even though the employer’s primary business operations are outside the state.