Happy Nails v. Su: Unemployment Insurance Appeals Board Decision That Cosmetologists Are Independent Contractors Bars Labor Commissioner from Finding That They Are Employees

Happy Nails & Spa of Fashion Valley, L.P. v. Su (7/19/13) --- Cal.App.4th ---, presents an interesting collateral estoppel issue in the context of administrative enforcement actions. 

In 2004, the Employment Development Department (EDD) issued assessments against a number of salons doing business under the name "Happy Nails," finding that they failed to pay unemployment insurance contributions. After a hearing, an administrative law judge found that cosmetologists working at the salons were independent contractors, rather than employees. The EDD appealed to the California Unemployment Insurance Appeals Board, which affirmed.

In 2008, the Labor Commissioner cited Happy Nails for failure to provide its cosmetologists with itemized wage statements. Happy Nails contested the citations, but a hearing officer at the Division of Labor Standards Enforcement (DLSE) affirmed.

Happy Nails then filed a complaint in Superior Court challenging the DLSE's findings and order. The court found for the Commissioner, rejecting Happy Nails' argument that the Board's findings collaterally estopped the Commissioner from acting.

The Court of Appeal reversed, holding that collateral estoppel applied. Slip op. at 11-17. The central issue -- whether the cosmetologists are employees or independent contractors -- was identical in the two proceedings; the issue was actually litigated; the issue was necessarily decided; and the decisions were final and on the merits. Finally, the EDD and DLSE, as agencies of the same government sharing the same goals, were in privity. 

The Court rejected the DLSE's arguments that: (1) the issues litigated differed because the facts presented in the two administrative hearings involved different salons and time periods and were otherwise not the same; (2) the DLSE sought to litigate Happy Nails' liability for failing to provide itemized wage statements, which differed from the issue of its unemployment tax liability; and (3) the Department and the Division are not in privity because they were established by different statutes, enforce different statutes and regulations, and use different definitions of "employee." Slip op. at 17-29.

The opinion is available here.