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Thursday, May 20, 2010

California Supreme Court Defines "Employer" Under California Wage Law

The California Supreme Court has issued its decision in Martinez v. Combs, addressing who is and who is not an “employer” under California wage law. Martinez includes a number of important rulings that employment lawyers need to know.

By way of background, Labor Code section 1194 gives employees the right to recover “the legal minimum wage or the legal overtime compensation.” The question of who must pay minimum wage or overtime under section 1194 has been addressed only once since 1913, when California passed its minimum wage law. That one decision was Reynolds v. Bement (2005) 36 Cal.4th 1075, in which the Court “looked to the common law rather than the applicable wage order to define employment in an action under section 1194 seeking to hold a corporation's directors and officers personally liable for its employees' unpaid overtime compensation.” Slip op. at 31, citing Reynolds, 36 Cal.4th at 1086-1088.

The Martinez plaintiffs were seasonal agricultural workers who worked during the 2000 strawberry season and who alleged that they were not paid minimum wages. They filed suit against their employer, Munoz, two of the “produce merchants” through whom Munoz sold strawberries, the principals of one of the “produce merchants,” and one of their supervisors. They alleged failure to pay minimum wages (LC 1194, 1194.2), failure to pay contract wages (LC 216), waiting time penalties (LC 203), penalties for failure to provide timely and accurate wage and hour statements (LC 226), and breach of contract.

The trial court granted summary judgment in favor of the produce merchants, their principals, and the supervisor. The Court of Appeal affirmed in part and reversed in part, using the federal “economic reality” test to find that those defendants were not the plaintiffs’ employers. The Supreme Court granted review and held pending its decision in Reynolds.

The Court began by laying out the arguments made by each of the parties:
Plaintiffs contend the language and history of section 1194 show the Legislature intended generally to defer to the IWC’s regulatory definitions of the employment relationship in its wage orders. Plaintiffs would give those definitions sweeping breadth. Specifically, plaintiffs argue defendants “suffer[ed], or permit[ted plaintiffs] to work” (Wage Order No. 14, Cal. Code Regs., tit. 8, § 11140, subd. 2(C)), because defendants knew Munoz would need to hire workers to fulfill his contracts with defendants, and that defendants thus, in some sense, suffered or permitted plaintiffs to work for their benefit. Plaintiffs further argue defendants “exercise[d] control over [plaintiffs’] wages, hours, or working conditions” (Wage Order No. 14, Cal. Code Regs., tit. 8, § 11140, subd. 2(F)), because defendants, under the terms of their contracts with Munoz, controlled the remittance to him of his share of the proceeds of sale, and thus a portion of the income from which he paid his employees.
Slip op. at 14-15.
Defendants, in opposition, cite our decision in Reynolds, supra, 36 Cal.4th 1075, where we looked to the common law to define employment in a suit under section 1194 seeking to hold the directors and officers of a corporation liable for its employees’ unpaid overtime compensation. (Reynolds at pp. 1086-1087.) Alternatively, in the event Reynolds is distinguishable and the wage order’s definitions do apply, defendants argue we should construe the wage order as if it incorporated the federal economic reality definition of employment developed in cases arising under the Fair Labor Standards Act of 1938 (29 U.S.C. § 201 et seq. (FLSA); see Goldberg v. Whitaker House Coop., supra, 366 U.S. 28, 33) and articulated in federal regulations promulgated under the FLSA; see 29 C.F.R. § 791.2) and the Migrant and Seasonal Agricultural Worker Protection Act (29 U.S.C. § 1801 et seq.; 29 C.F.R. § 500.20(h)(5) (2009)).
Slip op. at 15. The Court agreed with the plaintiffs, yet affirmed the Court of Appeal’s decision. It held:
In actions under section 1194 to recover unpaid minimum wages, the IWC’s wage orders do generally define the employment relationship, and thus who may be liable. An examination of the wage orders’ language, history and place in the context of California wage law, moreover, makes clear that those orders do not incorporate the federal definition of employment. Applying these conclusions to the facts of the case, we affirm the Court of Appeal’s judgment.
Slip op. at 15.

In reaching this holding, the Supreme Court made a number of extremely important points for both employees and employers.

First, “An examination of section 1194 in its statutory and historical context shows unmistakably that the Legislature intended the IWC's wage orders to define the employment relationship in actions under the statute.” Slip op. at 16. This point is primary, because the defendants had argued strenuously that Reynolds controlled and that section 1194 did not incorporate the Wage Order’s employer definition.

Second, the Wage Orders set forth a multi-pronged, disjunctive definition of employment: an employer is one who, directly or indirectly, or through an agent or any other person, engages, suffers, or permits any person to work, or exercises control over the wages, hours, or working conditions of any person. Slip op. at 25-26. The “engage, suffer, or permit” component of the definition does not require a common law “master and servant” relationship, but is broad enough to cover “irregular working arrangements the proprietor of a business might otherwise disavow with impunity.” Slip op. at 25. Further, “phrased as it is in the alternative (i.e., wages, hours, or working conditions”), the language of the IWC's 'employer' definition has the obvious utility of reaching situations in which multiple entities control different aspects of the employment relationship, as when one entity, which hires and pays workers, places them with other entities that supervise the work.” Slip op. at 26-27. Finally, the IWC’s “employer” definition is intended to distinguish state law from the federal FLSA.

Third, the IWC Wage Orders are entitled to “extraordinary deference.” Slip op. at 28-29. “Only by deferring to wage orders’ definitional provisions do we truly apply section 1194 according to its terms by enforcing the “legal minimum wage.” Slip op. at 31.

Fourth, as noted above, the Court’s decision in Reynolds does not decide the issues presented. The Court explained that the Reynolds plaintiffs conceded that “the plain language of Wage Order No. 9 defining employer does not expressly impose liability under section 1194 on individual corporate agents.” Slip op. at 32. “In a footnote, we added that the “plaintiff . . . ha[d] not persuaded us that one may infer from the history and purposes of section 1194 a clear legislative intent to depart, in the application of that statute, from the common law understanding of who qualifies as an employer.” Slip op. at 33. "[A]n examination of section 1194 in its full historical and statutory context shows unmistakably that the Legislature intended to defer to the IWC’s definition of the employment relationship in actions under the statute.” Slip op. at 33-34. As a result, the Court limited Reynolds to its facts:
In sum, we hold that the applicable wage order‘s definitions of the employment relationship do apply in actions under section 1194. The opinion in Reynolds, supra, 36 Cal.4th 1075, properly holds that the IWC‘s definition of employer does not impose liability on individual corporate agents acting within the scope of their agency. (Reynolds, at p. 1086.) The opinion should not be read more broadly than that.
Slip op. at 37.

Fifth, the common law employment definition continues to play a role in the IWC’s definition of the employment relationship, although it is only one alternative in the multi-prong definition. “In fact, the IWC‘s definition of employment incorporates the common law definition as one alternative.” Slip 34. To “engage,” in this definition, means “to create a common law employment relationship.” Slip 35.
To employ, then, under the IWC‘s definition, has three alternative definitions. It means: (a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.
One cannot overstate the impact of a such a holding on the IWC‘s powers. Were we to define employment exclusively according to the common law in civil actions for unpaid wages we would render the commission‘s definitions effectively meaningless.
Slip op. at 35-36.

Sixth, the IWC’s definition of the employment relationship does not incorporate federal law. “In no sense is the IWC’s definition of the term ‘employ’ based on federal law.” Slip op. at 37. As a result, California law does not incorporate the “economic reality” test found under federal law.
Having made these points, the Court turned its attention to the facts of the Martinez matter and the trial court’s order granting summary judgment.

The Court first held that the defendants did not “suffer or permit” the plaintiffs to work:
Here, neither Apio nor Combs suffered or permitted plaintiffs to work because neither had the power to prevent plaintiffs from working. Munoz and his foremen had the exclusive power to hire and fire his workers, to set their wages and hours, and to tell them when and where to report to work. Perhaps Apio or Combs, by ceasing to buy strawberries, might as a practical matter have forced Munoz to lay off workers or to divert their labor to other projects, such as harvesting berries for [others]. But any substantial purchaser of commodities might force similar choices on a supplier by withdrawing its business. Such a business relationship, standing alone, does not transform the purchaser into the employer of the supplier's workforce.
Slip op. at 43. In other words, to “suffer or permit to work” appears to co-terminate with the right to hire and fire, set wages and hours, and tell workers when and where to report to work.

The Court next held that the defendants did not “exercise control over” the plaintiffs’ wages and hours:
Certainly Wage Order No. 14's definition of “employer,” which encompasses “any person . . . who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person,” is broad enough to reach through straw men and other sham arrangements to impose liability for wages on the actual employer [...] [t]he undisputed facts, however, show that Munoz alone controlled plaintiffs' wages, hours and working conditions.
Slip op. at 45. Munoz “alone, decided which fields to harvest on any given day and whether to harvest strawberries for fresh market sale or for the freezer.” Slip op. at 46. He “operated a single, integrated business operation, growing and harvesting strawberries for several unrelated merchants and combining revenue from all sources with a personal investment, in the hope of earning a profit at the end of the season. Munoz paid his employees out of those combined revenues and assets.” Slip op. at 46-47. “Finally, Munoz alone, with the assistance of his foremen, hired and fired plaintiffs, trained and supervised them, determined their rate and manner of pay (hourly or piece-rate), and set their hours, telling them when and where to report to work and when to take breaks.” Slip op. at 47.

Query whether the result would have been different if Munoz had harvested berries for only one land owner, as in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, or if such a land owner had retained the right to hire and fire or otherwise control the plaintiffs’ work. The Court declined to decide Borello's relevance to the issues presented. Slip op. at 48.

The Court held that defendant Ruiz, who was the supervisor for one of the defendant “produce merchants,” also did not “exercise control over” the plaintiffs’ “wages, hours, or working conditions”:
Relying on the same evidence, plaintiffs also contend that Ruiz personally exercised control over their wages and hours and is thus personally liable as an “employer” under section 1194 and Wage Order No. 14. The claim fails under our holding in Reynolds, supra, 36 Cal.4th 1075, that the IWC’s definition of “employer” does not impose liability on individual corporate agents acting within the scope of their agency. (Reynolds, at p. 1086.) Plaintiffs specifically allege in the operative complaint that Ruiz, in making the alleged statements on May 27, 2000, was “acting in his capacity as agent for [Combs] . . . .”
Slip op. at 51. Despite the Court’s earlier language limiting Reynolds, it continues to provide a defense for individuals acting in their role as corporate agents.

The Court next held that the defendant produce merchants did not control the plaintiffs working conditions “through their field representatives’ activities in the areas of quality control and contract compliance.” Slip op. at 51.
Supervision of the work, in the specific sense of exercising control over how services are performed, is properly viewed as one of the working conditions mentioned in the wage order. To read the wage order in this way makes it consistent with other areas of the law, in which control over how services are performed is an important, perhaps even the principal, test for the existence of an employment relationship.
Slip op. at 52. However:
No evidence suggests Munoz’s employees viewed the field representatives as their supervisors or believed they owed their obedience to anyone but Munoz and his foremen. Plaintiffs, relying on cases interpreting other bodies of law, argue the right to exercise control over the manner in which work is performed is sufficient to prove the existence of an employment relationship, whether or not the right is exercised. But even assuming the same rule applies here, Munoz’s contracts with Apio and Combs gave the merchants no right to direct his employees’ work. Neither does any evidence in the record suggest that anyone — Munoz, Apio, Combs, the merchants' field representatives, or plaintiffs — believed the merchants or their representatives had such a right. Confusion on this point was not likely to arise, since Munoz and his foremen were present when the field representatives interacted with Munoz's employees.
Slip op. at 53.

Finally, the Court held that the plaintiffs were not third party beneficiaries of the contract between Munoz and his produce merchant. Even assuming that the plaintiffs had standing to enforce the contract, its provision requiring Munoz to pay the plaintiffs lawful wages would confer no benefit on the plaintiffs. Slip op. at 54.

The full opinion is available on the Court's web site in .pdf or .doc format. 

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