LOS ANGELES-California employers have scored a victory with a state appellate court ruling that says fired independent contractors cannot sue for discrimination.

Observers say the ruling could encourage employers to restructure their workforces and hire or reclassify employees as temporary contractors.

They warn, though, that both the law and the courts could make this process difficult. In a recent decision, for instance, a federal appellate court found that Microsoft Corp. was obligated to pay benefits to workers it had wrongly classified as independent contractors (BI, July 28).

The Oct. 1 ruling by the 2nd Appellate Court in Los Angeles in Anna Maria Sistare-Meyer vs. Young Men's Christian Assn. of Metropolitan Los Angeles eventually may be considered by the California Supreme Court as well, say some observers. Ms. Sistare-Meyer's attorney said he is considering such an appeal.

According to the decision, in 1991 Ms. Sistare entered into an independent contractor agreement with the YMCA to provide a program of teaching, dancing and tumbling at the YMCA's Crenshaw branch. Her contract was terminated in March 1993.

Ms. Sistare-Meyer filed suit in 1994, charging wrongful discharge in violation of public policy. She claimed she had beenfired because she is Caucasian.

The appellate court upheld a lower court ruling dismissing the charge, which was her sole remaining claim. The court notes the California Constitution says a person cannot be kept from "pursuing a business, profession, vocation or employment" because of discrimination.

"The question thus represented is whether the policy. . .reaches beyond the employer/employee relationship to encompass those who hire independent contractors," says the decision.

"Here, the longstanding distinction between employees and independent contractors presents important competing policy concerns," the decision says. "California common and statutory law distinguishes independent contractors from employees, and their statuses, though rooted in contract, are significantly different."

The decision notes independent contractors typically have greater control over the way they carry out their work than employees, while businesses assume fewer duties with respect to contractors.

"Thus, the independent contractor status provides the hiring party and the worker with an alternative relationship that gives each more freedom and flexibility than the employer/employee relationship," according to the decision.

Neither the constitution nor the body of law concerning independent contractors "clearly favors the public interest in curbing discrimination over the existing social benefits attached to the independent contractor-hiring party relationship," says the decision. The court concluded that independent contractors cannot bring discrimination-based suits.

"I think the opinion opens the door for employers to creatively characterize their workforce as independent contractors and then discriminate at will," said Ms. Sistare-Meyer's attorney, Drew E. Pomerance of Roxborough, Pomerance & Gallegos in Los Angeles.

Employers in the past have succeeded at "getting around" buying workers compensation insurance or fulfilling their tax responsibilities by characterizing employees as independent contractors, Mr. Pomerance added. "I don't see any reason why this would be different."

Jeffrey D. Wohl, an employer attorney with Orrick, Herrington & Sutcliffe in San Francisco, said, "The case will serve as an impetus for companies to consider recharacterizing workers as independent contractors to avoid the discrimination laws and the employment laws."

Most employers think those laws give rise to a large number of claims "and would like to avoid those claims if they could by characterizing people as independent contractors," Mr. Wohl said.

Patricia Gillette, an attorney with Heller Ehrman White & McAuliffe in San Francisco, noted that many businesses in California's Silicon Valley already have adopted the use of independent contractors.

"Some employers may read this as an even bigger incentive to do that, because now they have no liability for discrimination, at least under the California constitution," she said.

"I think it might encourage more flexibility in the workplace," said Angela Bradstreet, an employer attorney with Carroll Burdick & McDonough in San Francisco. "I think it might encourage employers and individuals to explore more creative forms of working with one another rather than just an employer/employee relationship," she said.

Observers warn, however, there could be dangers in doing this.

Characterizing workers as independent contractors is "easier said than done," said Mr. Wohl. "It's not the case that every employee can be magically transformed to an independent contractor, and therefore, some employers will mistakenly think that (by) just renaming people independent contractors, they can take advantage of the case and thereby avoid employment law liability," he said.

Mr. Wohl noted the decision does not address who is and is not an independent contractor.

The more that companies use the fiction of independent contractors to circumvent labor and discrimination laws, "the more likely the courts and Legislature will find ways to address these problems," said Cliff Palefsky, an attorney with McGunn, Hillsman & Palefsky in San Francisco. He represents employees.

In cases such as Microsoft, he said, the courts already have succeeded in "getting through to the substance of the relationship."

"Most of the employees that are considered to be an independent contractor by an employer are, in fact, employees, and you can usually convince a court" of that, said Barbara Lawless, an attorney with Lawless, Horowitz & Lawless in San Francisco who represents employees.

Ms. Lawless said that in every case she has had involving people classified as independent contractors, she has successfully argued that an employee so classified was in fact an employee.

If there is any type of employer control, such as having these workers report at 9 a.m. for seven hours of work, they are deemed to be employees, not independent contractors, said Ms. Lawless. Because of this, "I don't think (the decision) is going to be all that significant in its application," she said.

Ms. Gillette said, "Given the limited rights now of independent contractors," there may be new emphasis by the Department of Labor, one of the entities responsible for making sure workers are correctly classified, to come down harder on employers that classify workers as independent contractors. "In reality, the number of truly independent contractors is slim," she added.

"That whole area is terribly complex," said Kent Jonas, an employer attorney with Thelen Marrin Johnson & Bridges in San Francisco. "Employers need to be very wary before they leap to classify someone as an independent contractor, because if they're wrong," the benefit, workers compensation and tax consequences can be substantial, he said.

Anna Maria Sistare-Meyer vs. Young Men's Christian Assn. of Metropolitan Los Angeles et al., California Court of Appeal, 2nd Appellate District, Division 4; No. B105274