Companies Potentially Liable for Independent Contractors & Third-Party Vendors

August 14, 2017

Appellate Court Rules on Jones v. Royal Administration Services, Inc.

On August 9, 2017, the Ninth Circuit published an opinion analyzing the factors used to determine when a company may be liable for the actions of third parties acting as its agents in Jones v. Royal Administration Services, Inc., 2017 S.O.S. 15-17328 (9th Cir. August 9, 2017.)

This decision is important to consider because it provides the factors that will be utilized by a court to determine whether a business may be held liable for the acts of independent contractors and third-party vendors. 

Plaintiffs, whose cellular telephone numbers are registered on the national do-not-call registry, sought to hold Royal Administration Services, Inc. (Royal) was vicariously liable for several telephone calls that were made in violation of the Telephone Consumer Protection Act (TCPA) by telemarketers employed by All American Auto Protection, Inc. (AAAP).  Royal could only be held vicariously liable for these calls if the telemarketers were acting as its agents when the calls were placed.  AAAP was one of the 20 different companies that Royal had entered into a marketing agreement with to sell Royal's vehicle service contracts (VSC) also known as extended warranties.

Royal did not challenge whether there was significant evidence in the record to prove the telemarketers employed by AAAP violated the TCPA.  Rather, Royal disputed that it could be held vicariously liable for those calls under an actual authority theory.  The court adopted the following ten factors as relevant to the determination of whether an individual providing services for a principal is an agent or independent contractor:  

(1) the control exerted by the employer,

(2) whether the one employed is engaged in a distinct occupation,

(3) whether the work is normally done under the supervision of an employer,

(4) the skill required,

(5) whether the employer supplies tools and instrumentalities [and the place of work],

(6) the length of time employed,

(7) whether payment is by time or by the job,

(8) whether the work is in the regular business of the employer,

(9) the subjective intent of the parties, and

(10) whether the employer is or is not in business.

See United States v. Bonds, 608 F.3d 495, 505 (9th Cir. 2010)(citing Restatement (Second) Of Agency, Section 220(2)(1958))  The Ninth Circuit applied the factors as follows:

(1)  Control Exerted by Royal over AAAP:

The Court acknowledged that Royal exercised some control over AAAP, including, but not limited to (a) AAAP was required to keep records of its interactions with consumers who purchased Royal VSCs, give Royal weekly reports on VSC sales, and provide notice of requests to cancel Royal VSCs; (b) AAAP was also required to implement security measures to protect consumer information, collect payments on behalf of Royal, and obtain Royal’s approval before using sales literature to assist in the sale of Royal VSCs; (c) AAAP was only permitted to use the “scripts and materials” Royal approved and had to comply with the “guidelines and procedures” Royal provided when selling Royal products; (d) these guidelines and procedures generally required AAAP to “operate in accordance with laws and regulations” and refrain from making “false and misleading” representations; and (e) Royal suspended its relationship with AAAP on one occasion after it suspected AAAP telemarketers were violating Royal’s standards and procedures.

However, Royal had only limited control of AAAP’s telemarketers as (a) Royal did not have the right to control the hours the telemarketers worked nor did it set quotas for the number of calls or sales the telemarketers had to make; (b) Royal did not have any control of a telemarketer’s call until the telemarketer decided to pitch a Royal VSC to the consumer.  When an AAAP telemarketer reached a consumer, they first had to sell the consumer on the idea of a VSC.  Royal did not have control over this sales pitch and only after the consumer was sold on the idea of a VSC, would an AAAP telemarketer pitch a specific VSC.  If the specific VSC was a Royal VSC would Royal control the “scripts and materials” the telemarketer was permitted to use in the sale; and (c) AAAP sold VSCs for multiple companies.

In this case, an AAAP telemarketer pitched a VSC to a plaintiff during only one call, during which, the telemarketer attempted to sell a “Diamond New Car” protection plan—a plan not sold by Royal through AAAP.  In addition, there was no evidence that AAAP telemarketers ever tried to sell Royal VSCs to the Plaintiffs.

Accordingly, Royal never specifically controlled any part of any of the calls to the plaintiffs.

(2)  Whether the One Employed is Engaged in a Distinct Occupation

AAAP was an independent business, separate and apart from Royal and it was engaged in the “distinct occupation” of selling VSCs through telemarketing for many different clients and offered the same services to companies other than Royal.  Thus, this factor strongly suggests AAAP's telemarketers were independent contractors rather than agents or employees of Royal.

(3)  Whether the Work is Normally Done Under the Supervision of an Employer

The AAAP telemarketer calls were not normally done under the supervision of Royal.  Royal's "agent of record" for the AAAP account did provide some training at AAAP’s call center, and Royal’s president visited the call center about a dozen times over the course of three years. Therefore, this factor also favored finding that AAAP’s telemarketers were independent contractors.

(4)  The Skill Required

No evidence was presented regarding the skill required to place the calls or sell a VSC.  Thus, the court did not consider this factor.

(5)  Whether the Employer Supplies Tools and Instrumentalities

Royal provided AAAP with some "tools and instrumentalities" necessary to complete the sales things necessary to complete the sales, such as ((a) provided the contracts that were to be sold and gave AAAP access to their “on-line Contract quote manager”; and (b) trained AAAP telemarketers in how to sell Royal contracts.

However, on the other hand, AAAP provided far more tools and instrumentals, including its own phones, computers, furniture, and office space. In addition, if AAAP wanted any “brochures [or] other sales literature,” it had to develop and manufacture them itself.

Thus, AAAP’s supply of most of the “tools and instrumentalities” supported a finding of independent contractor status.

(6)  Length of Time Employed

The original contract was in effect for only one year, with each party retaining the ability to cancel the contract at any time on 30 days’ notice.  Ultimately, AAAP sold VSCs for Royal for three years. Although three years is not a particular short period of time, the limited nature of the original contract showed there was a “contemplated end to the . . . relationship.”  The Court found that the designated impermanency of the relationship supported a finding of independent contractor status.

(7)  Whether Payment is By Time or By Job

AAAP was paid a commission for each sale, rather than the time the telemarketers worked.  The Court also found that this was a strong indicator that the telemarketers were independent contractors.

(8)  Whether the Work is in the Regular Business of the Employer

Royal specifically contracted out all its direct sales to many different vendors and car dealerships instead of hiring its own employees to sell its VSCs.  However, Royal is in the business of selling VSCs; Thus the Court found that AAAP’s sales are a regular part of Royal’s business and as a result, this factor tends to favor finding an agency relationship.

(9)  The Subjective Intent of the Parties

There was no clear evidence regarding subjective intent of the parties.  Nevertheless, the fact that AAAP sold VSCs for multiple companies indicated AAAP’s intent was to have its telemarketers operate as independent contractors for many different companies.

(10)  Whether the Employer Is or Is Not in Business

Royal is a business, which favors finding an agency relationship.

Taking all of the above factors into account, the Court found that it was clear that AAAP’s telemarketers were independent contractors rather than agents. Since AAAP’s telemarketers were independent contractors, rather than Royal’s agents, Royal cannot be held vicariously liable for any calls the telemarketers made in violation of the TCPA, it was proper for the district court to grant Royal’s motion for summary judgment.

For additional information, or further analysis, please contact Gil Glancz.