Dynamex Operations West v. Superior Court: Who Is An Employer? (Revisited)

In Martinez v. Combs (2010) 49 Cal.4th 35 (discussed here), the California Supreme Court held that the broad, three pronged definition of "employer" found in the IWC Wage Orders applies in minimum wages actions brought under Labor Code section 1194. The question after Martinez was whether the Wage Order definition of "employer" would apply in all wage and hour actions or whether courts would continue to look at the multi-factor test found in cases such as S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.

Dynamex Operations West, Inc. v. Superior Court (Lee) (10/15/14) --- Cal.App.4th --- addresses these issues.

The plaintiffs in Dynamex filed a class action, alleging that the defendant violated a range of wage and hour laws by classifying them as independent contractors, rather than employees. The defendant petitioned for a writ of mandate after the trial court denied its motion to decertify the class. It argued that the Borello "right to control" test applied, and that individual issues under that test would predominate over common issues. 

The Court of Appeal granted the petition in part, holding that the Wage Order definition of "employer" applies to those claims that fall within the scope of the Wage Order. Slip op. at 12-16. As to claims that fall outside the scope of the Wage Order, the multi-factor test discussed in Borello applies.

The real question becomes this: How do you know whether a claim falls within the scope of the Wage Order? For minimum wage and overtime claims, the answer seems clear. For other types of claims, such as the Labor Code section 2802 reimbursement claim in Dynamex, not so much. One can only assume that this particular issue will require greater clarification.

The Court also held that use of the Wage Order definition is not limited to determining whether an entity is a joint employer. Slip op. at 16, n. 14. Rather, it applies in any Wage Order claim in which one's employment status is at issue. 

The opinion is available here.

Castaneda v. The Ensign Group: Parent Corporation May Be Employer of Wholly Owned Subsidiary's Employees

In Castaneda v. The Ensign Group, Inc. (9/15/14) --- Cal.App.4th ---, plaintiff John Castaneda sued The Ensign Group, Inc. (Ensign) in a class action lawsuit alleging wage and hour violations. He alleged that Ensign was the alter ego of the Cabrillo Rehabilitation and Care Center (Cabrillo), the nursing facility where he worked. The trial court granted summary judgment for Ensign, holding that it was not Castaneda's employer as a matter of law. The Court of Appeal reversed, holding as follows:

Under Martinez v. Combs (2010) 49 Cal.4th 35, Castaneda raised a triable issue of material fact as to whether Ensign was his joint employer by introducing, inter alia, evidence of the following:

Ensign was the sole shareholder of Cabrillo and other companies involved in Cabrillo's operations; these entities shared the same corporate address; they used "centralized information technology, human resources, accounting, payroll, legal, risk management, educational and other key services"; they shared corporate officers; Ensign supervised and controlled Cabrillo's employees' job functions; Ensign provided mandatory policy and training videos at Cabrillo; and Ensign handled employee discipline issues at Cabrillo. Slip op. at 5-9. 

The opinion is available here.

Bain v. Tax Reducers: Court Rules on Statute of Limitations, Equitable Tolling, Individual Liability, and Other Issues in Individual Wage Case

Bain v. Tax Reducers, Inc. (8/28/13) --- Cal.App.4th --- addresses a number of interesting issues.
In 2005, Harold Bain filed a Labor Commissioner (LC) action against Tax Reducers, Inc. (TRI). The LC awarded Bain $15,000 in wages, interest, and penalties. 

Bain appealed to the Superior Court, and in December, 2006, the parties agreed to settle.  In May, 2008, Bain sued TRI to enforce the settlement agreement, for contract damages based on the settlement agreement, and for Labor Code violations. In September, 2010, Bain amended his complaint to name TRI's principal shareholder, Griffin, as a defendant. 

The trial court granted summary judgment for Griffin, finding that he was not Bain's employer and was not liable on Bain's claims. After trial, the court awarded Bain $25,000 in unpaid wages, waiting time penalties, liquidated damages, and interest, plus attorney fees and costs. Both sides appealed, and the Court of Appeal affirmed in part and reversed in part, holding: 

A three-year statute of limitations applied to Bain's claims for unpaid wages and waiting time penalties. Slip op. at 18-19. However, Bain's claim for liquidated damages under Labor Code 1194.2 was a claim for penalties, and a one-year statute applied. Slip op. at 19-20. 

Bain's claims were not time-barred because the doctrine of equitable tolling applied. Slip op. at 20-28. Equitable tolling applies “[w]hen an injured person has several legal remedies and, reasonably and in good faith, pursues one.” Because the Labor Code gave Bain the option to pursue his claims in front of the LC or in court, equitable tolling applied when he filed his LC claim. Filing the LC claim gave TRI notice of the claim, the delay did not prejudice TRI's defense of the court action, and Bain acted in good faith. 

The trial court properly relied on the presumption that every person who performs services for another is an employee. Slip op. at 28-33. Even if the trial court erred in applying such a presumption, it "properly analyzed the evidence according to the multi-factor test from" S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.  Substantial evidence supported the trial court's finding under this analysis that Bain was TRI's employee.  

The trial court properly imposed waiting time penalties under Labor Code section 203. Slip op. at 34-39. Analysis of Bain's employment status was not novel and did not involve an unsettled area of law. 

The trial court did not err in denying Bain's motion for leave to amend his complaint to name TRI's principal, Griffin, as a defendant. Slip op. at 41-46. After reviewing Reynolds v. Bement (2005) 36 Cal.4th 1075, and Martinez v. Combs (2010) 49 Cal.4th 35, the Court held that Griffin could not be liable as a joint employer: 

Bain argues that Griffin meets all three alternative definitions of employer from Martinez because he controlled Bain's hours, working conditions, and whether Bain was paid. However, Bain's contention ignores the court's holdings in Reynolds, which was reaffirmed in Martinez, that the wage orders' definition of “employer” does not impose liability on individual corporate agents acting within the scope of their agency. (Martinez, at p. 75.) In this case, there was no evidence that Griffin acted outside the scope of his agency as an officer and a shareholder of TRI. There is no allegation or evidence that Griffin misappropriated Bain's unpaid wages to himself for his individual advantage. (Reynolds, supra, 36 Cal.4th at p. 1090.) This case is also factually distinguishable from Martinez, because there was no evidence that supported the conclusion that Griffin was a joint employer with TRI.  

Slip op. at 45. 

The opinion is available here.

Ayala v. Antelope Valley Newspapers: Supreme Court Orders Supplemental Briefing on Martinez v. Combs

In Ayala v. Antelope Valley Newspapers, Inc. (9/19/12, pub. 10/17/12) 210 Cal.App.4th 77 (discussed here), the plaintiffs sought to certify a class of newspaper home delivery carriers, alleging that AVP improperly classified them as independent contractors rather than employees. The trial court held that individual issues predominated because of numerous variations in how the carriers performed their jobs. The Court of Appeal reversed in part, holding that such variations did not preclude class certification under S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.

On January 30, the Supreme Court granted the defendant's petition for review. Case No. S206874. And on June 26, the Court ordered the parties to submit letter briefs: 

discussing the relevance of Martinez v. Combs (2010) 49 Cal.4th 35, 52-57, 73, and IWC wage order No. 1-2001, subdivision 2(D)-(F) (Cal. Code Regs., tit. 8, § 11010, subd. 2(D)-(F)), to the issues in this case. (See also Sotelo v. Medianews Group, Inc. (2012) 207 Cal.App.4th 639, 660-662; Bradley v. Networkers Internat., LLC (2012) 211 Cal.App.4th 1129, 1146-1147.)  

Interesting.  Martinez (discussed here) held that the IWC Wage Order defines an employer as one who, directly or indirectly, or through an agent or any other person, (1) engages, (2) suffers or permits any person to work, or (3) exercises control over the wages, hours, or working conditions of any person. Martinez held further that Labor Code 1194 (minimum wage and overtime) adopts this broad, disjunctive definition of "employer."  

Sotelo (discussed here) affirmed a trial court order denying certification of a class of newspaper carriers, stating that the trial court should have analyzed employment vs. independent contractor status under Martinez, but that the failure to do so was harmless error.  

Bradley (discussed here) reversed a trial court order denying certification, holding that common evidence would be used to determine whether the class members were independent contractors or employees, whether the trial court ultimately used the standard enunciated in Borello or the one in Martinez. 

As always, stay tuned here for further developments.  This is going to be interesting.    

Sotelo v. MediaNews: Court Affirms Denial of Class Certification

In Sotelo v. MediaNews Group, Inc. (7/2/12) --- Cal.App.4th ---, the plaintiffs were newspaper carriers and the "distributors" who supervised or employed them. They alleged that the defendant newspaper publishers misclassified them as independent contractors when they were in fact employees. The trial court (Alameda County Superior, Judge Steven A. Brick) denied certification, and the Court of Appeal affirmed.

I. Ascertainability of the Proposed Class

First, the Court held that the proposed class was not ascertainable because many putative class members had no agreements with the defendants and could not otherwise be identified through the defendants' records. As stated by the trial court: "The determination of whether a person who signed no carrier contract with a defendant nonetheless bagged and delivered papers for a defendant during the class period will devolve into a disputed mini-hearing, requiring sworn statements and/or deposition testimony from that class member, the evaluation of circumstantial evidence, and credibility determinations."

The Court rejected the plaintiffs' argument that "any difficulties with identifying putative class members are due to respondents' failure to keep accurate records and that respondents cannot defeat certification by their own wrongdoing in not maintaining proper records." Aguiar v. Cintas Corp. No. 2 (2006) 144 Cal.App.4th 121, 136.  

In Aguiar the dispute concerned certain employees of Cintas who had worked on the company's contracts with the Los Angeles Department of Water and Power (DPW) [sic].  Cintas was under a contractual obligation to track the employees who worked on DPW [sic] contracts, but failed to do so. Thus, when the court concluded that Cintas could not defeat class certification, on ascertainability grounds, because of its own failure to keep records that it was obligated to keep, that obligation was uncontested and independent of the outcome of the employees' suit. Here, any obligation on respondents' part to track all members of the proposed class depends on the merits of the suit being brought. Appellants cannot bootstrap their action merely by assuming as true what they are obligated to prove. 

Slip op. at 8. The Court also held that the plaintiffs had not proposed a feasible plan for giving the putative class members notice of the action. Ibid.

The Court next held that the trial court did not err in failing to limit the class to those individuals for whom records existed showing their work for defendants. Although it would have been appropriate to so limit the class if the other certification requirements had been met, they were not, as discussed below. Slip op. at 8-9.

II. Predominance 

The Court then held that the plaintiffs had not met their burden of showing that common legal and factual issues predominate. 

A. Overtime, Meal Break, and Rest Break Causes of Action

The trial court held:

Plaintiffs must prove that putative class members in fact worked sufficient days and/or hours to be entitled to overtime and sufficient hours in a day to be entitled to meal and/or rest breaks. These inquiries involve the examination of different facts from the classification question; the motion, however, fails to discuss whether there is common evidence on this issue." [The evidence indicated] "a wide variation among carriers in the number of hours they worked each day . . . and that their ability to take breaks turned on factors that varied substantially across the proposed class . . . . [¶] Similarly, on the overtime question, it appears that routes and helper arrangements varied such that not all routes would take more than 8 hours per day to fold and throw. Several class members hired helpers so they could end their workday early . . . . Plaintiffs have not provided evidence . . . showing that substantial numbers of class members were not free to subcontract in this fashion . . . . Defendants, on the other hand, have shown that many carriers felt free to employ help in their routes—and did so. . . . [¶] The record likewise shows that carriers were generally permitted to, and did, obtain substitutes so that they did not have to work 7 days in a week.  

Slip op. at 11.  The Court of Appeal rejected the plaintiffs' argument, relying primarily on Jaimez v. Daiohs USA, Inc. (2010) 181 Cal.App.4th 1286 (discussed here), that these issues go primarily to damages.  The Court distinguished Jaimez:

The difference between Jaimez and this case is that in Jaimez, the plaintiff actually presented the court with a theory of recovery that specified the uniform policies and practices of the defendant that acted to establish liability for overtime. The complaint in Jaimez "asserted that [defendant] consistently administered a uniform corporate policy that violated California law with respect to overtime and meal and rest break requirements." As to the overtime claims, the Jaimez court found that the "predominant common factual issues include: (1) whether [defendant] had a uniform practice of misclassifying RSR's as exempt; and (2) whether [defendant] had a uniform policy of requiring RSR's to work overtime, but failing to pay them for their overtime hours." Appellants' allegation that respondents have misclassified putative class members as ICs rather than employees is only part of the equation. In contrast to Jaimez, appellants have not alleged that respondents have a uniform policy that requires putative class members to work overtime.

Slip op. at 13. The Court similarly distinguished Jaimez as to the plaintiffs' meal and rest period claims. "Jaimez is not helpful to appellants because appellants have not alleged that respondents have uniform practices or policies, beyond the issue of employee misclassification, that would establish liability for overtime or rest/meal break violations." Slip op. at 14.

B. Fraud and Concealment Causes of Action

The trial court found that the plaintiffs' motion "wholly fails to address plaintiffs' first two causes of action, for fraud and concealment." The plaintiffs' effort to remedy this defect on appeal was not sufficient. Slip op. at 15.

C. Employee Status

The Court next considered the "pivotal" issue in several causes of action: whether the putative class members were independent contractors or employees. The Court examined this issue under the multi-factor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.

The trial court first concluded that the evidence demonstrated little variance as to the issue of respondents' control over the details of putative class members' work. However, the court stated that "there are so few 'details' in a carrier's work that a newspaper needs (or wants) to control that this factor is not likely to weigh heavily in the merits analysis." Slip op. at 16-17. 

The Court rejected the plaintiffs' argument that the trial court failed to give sufficient weight to the control factor. "The court," it held "was not dismissing the importance of the factor, but commenting on the degree to which the factor was likely to be an issue of actual controversy at trial." Slip op. at 17.

Appellants argue that "common questions predominate in the overarching inquiry of whether carriers were misclassified as independent contractors; class treatment is therefore the most efficient way to proceed. The lower court abused its discretion by focusing on the divergent experiences of a select minority of class members and ignoring the overwhelming similarities among the majority." If the court had actually focused on the divergent experiences of a select minority, we might conclude that substantial evidence did not support the determination of the trial court that a number of factors would require individual testimony. However, appellants point to no evidence in the record that proves the characteristics of the majority. Survey evidence from a well-selected sample of the 5,000 identified class members might have supported appellants' contention, but none is present in the record. Thus, we cannot say that the court's determinations as to the various factors were not supported by substantial evidence.

Slip op. at 20.

The Court next considered whether application of Martinez v. Combs (2010) 49 Cal.4th 35 (discussed here), which was issued during the pendency of the appeal, would change the result. The Court first held that Martinez is not limited to joint employment situations. Slip op. at 22. The Court next held that the trial court erred in failing to apply the wage order's multi-pronged, alternative employer definition, at least as to the overtime cause of action. Ibid. However, the error was harmless because the trial court had already correctly held that common issues did not predominate as to that cause of action. Ibid.

III. Failure to Use Subclasses or Other Creative Devices

In its order denying certification, the trial court expressed surprise that the plaintiffs had not proposed subclasses "given the existence of about 30 potential employers in this case and the differences in their policies and procedures among themselves and over time...  Indeed, on reply, plaintiffs made a few general suggestions regarding subclassing, but did not explain if or how the types of subclasses they mention could cure or reduce commonality problems."  

The trial court did not err in declining to certify subclasses or use other, unspecified creative devices to allow for certification.  "Here, the court considered appellants' proposals, fulfilling its obligation, and found them deficient because they failed to discuss how they would cure the issues the court had identified. There was no abuse of discretion."  Slip op. at 23.   

The opinion is available here. 

Arnold v. Mutual of Omaha: Court Finds That Nonexclusive Insurance Agent Was Not Employee

I missed this case when it came out in December: Arnold v. Mutual of Omaha Insurance Company (12/30/11) 202 Cal.App.4th 580.

Plaintiff Kimbly Arnold worked as a nonexclusive insurance agent for Mutual of Omaha Insurance Company (Mutual). After plaintiff terminated her contractual relationship with Mutual, she filed a putative class action alleging failure to reimburse expenses (LC 2802) failure to pay wages on termination (LC 201-203) and violation of the Unfair Competition Law. The trial court (Contra Cost County, Judge Cheryl R. Mills) granted summary judgment, applying the test in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 34 to find that Arnold was an independent contractor, rather than an employee.

Arnold argued that the trial court should not have applied Borello, but should have looked to Labor Code section 2750 to define “employee” for purposes of section 2802. Section 2750 provides:

The contract of employment is a contract by which one, who is called the employer, engages another, who is called the employee, to do something for the benefit of the employer or a third person.

The Court of Appeal first discussed the test set forth in Borello, to which it referred as the "common law" test.

I have to note here that the test articulated in Borello is not the common law test. The Borello court explained that, while the factors considered under the common law test overlap to a certain extent with those considered under the Workers Compensation Act, "the concept of  'employment' embodied in the Act is not inherently limited by common law principles. We have acknowledged that the Act's definition of the employment relationship must be construed with particular reference to the 'history and fundamental purposes' of the statute."  Borello, 48 Cal.3d at 351.  

In any case, the Court held that "section 2750 does not supply such a definition of 'employee' that is clearly and unequivocally intended to supplant the common law definition of employment for purposes of Labor Code section 2802."  Slip op. at 7.  

Having determined that the Borello test applied to the question at hand, the Court affirmed the trial court's decision that Arnold was an independent contractor as a matter of law.  The Court found the following facts persuasive: 

Arnold used her own judgment in determining whom she would solicit for applications for Mutual's products, the time, place, and manner in which she would solicit, and the amount of time she spent soliciting for Mutual's products.  Her appointment with Mutual was nonexclusive, and she in fact solicited for other insurance companies during her appointment with Mutual.  Her assistant general manager at Mutual's Concord office did not evaluate her performance and did not monitor or supervise her work.  Training offered by Mutual was voluntary for agents, except as required for compliance with state law.  Agents who chose to use the Concord office were required to pay a fee for their workspace and telephone service.  Arnold's minimal performance requirement to avoid automatic termination of her appointment was to submit one application for Mutual's products within each 180-day period.  Thus, under the principal test for employment under common law principles, Mutual had no significant right to control the manner and means by which Arnold accomplished the results of the services she performed as one of Mutual's soliciting agents.  

Slip op. at 9-10.  

I find this decision very strange. First, as I stated above, the Court confuses the common law and Borello tests of employment.  

More importantly, the Court does not discuss the impact of Martinez v. Combs (2010) 49 Cal.4th 35. Martinez held that in an action for unpaid minimum wages under Labor Code section 1194, the Wage Orders, rather than the common law test or the Borello multi-factor test, define the employment relationship. “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.” Martinez, 49 Cal.4th at 52. Sections 1194 and 2802 were enacted by the same legislation in 1937, and I would have thought that this issue would have been raised.  

The opinion is available here.  

Futrell v. Payday California: Court of Appeal Affirms Finding that Payroll Processing Company Did Not Employ Plaintiff

Futrell v. Payday California, Inc. (December 16, 2010) --- Cal.Rptr.3d ----, 2010 WL 5117629, is one of the first published appellate cases applying the Supreme Court's recent decision in Martinez v. Combs, which defines employment for California wage law purposes. The Court described the case as follows:

This appeal arises from a class action alleging violations of sections of the Labor Code and the federal Fair Labor Standards Act (FLSA) by a payroll processing company operating in the local television commercial production industry. Plaintiffs' primary claim is that the payroll company violated various Labor Code and FLSA wage statutes, including Labor Code sections 510 and 1194 (authorizing a private right of action), by failing to pay statutorily required overtime compensation rates to Plaintiffs. In the context of a motion for summary adjudication of issues (SAI), the trial court ruled the payroll company had not been Plaintiffs' “employer.” The court thereafter entered judgment in favor of the payroll company, and Plaintiffs filed the appeal that comes before us today.

While Plaintiffs' appeal was pending in our court, the Supreme Court decided Martinez v. Combs (2010) 49 Cal.4th 35 (Martinez), cementing at least three employment principles in place which are relevant to the appeal. First, “no generally applicable rule of law imposes on anyone other than an employer a duty to pay wages.” (Id. at p. 49, italics added.) Second, a wage order adopted by the Industrial Welfare Commission (IWC) for a particular occupation, trade or industry, “and not the common law, properly defines the employment relationship in [an] action under section 1194.” (Id. at p. 62; id. at pp. 52-66.) Third, wage orders issued by the IWC “do not incorporate the federal definition of employment” under the FLSA. (Martinez, at p. 52; id. at pp. 66-68.) Because our review of the trial court's ruling on the motion for SAI is de novo (McDonald v. Antelope Valley Community College Dist. (2008) 45 Cal.4th 88, 114), we now apply Martinez. Having done so, and having separately considered federal case law interpreting the FLSA, we affirm the judgment in favor of the payroll company.

Slip op. at 1. The evidence on summary adjudication included the following:

Payday's evidence in support of its motion for SAI showed that Payday did not hire or fire Futrell or have the authority to do so. Further, the evidence showed Payday did not control Futrell's work, did not set or negotiate his wages, did not assign or supervise his work, did not determine his hours or conditions of employment, and did not set his work schedule. In addition, Payday presented evidence that it never entered into a written or oral employment contract with Futrell.

***

Futrell's evidence showed he completed timecards, employee information sheets, employment eligibility verifications, and W-4 employee withholding certificates provided by Payday, and that Payday collected the information about the hours he worked from the timecards and placed the information into Payday's computer payroll system to generate Futrell's paychecks. The pay stubs provided with Futrell's paychecks identified Futrell as the “employee” and identified Payday as the “employer of record.” Payday furnished W-2 forms which identified Payday as Futrell's “employer.” Futrell also presented evidence that Payday was considered by the Internal Revenue Service as an employer of record for income tax and unemployment insurance purposes. In addition, the evidence showed that the funds accessed for Futrell's paychecks were drawn on Payday's accounts and that Payday paid premiums for workers' compensation insurance and unemployment insurance covering Futrell. Don McVeigh, an expert in “the insurance industry, including matters involving workers' compensation insurance,” submitted a declaration in which he stated that only an “employer” can purchase workers' compensation insurance. Finally, Futrell showed the general practices at Reactor's television commercial productions included a freelance production supervisor working on site “to liaise” with Payday.

Slip op. at 3. The trial court granted the motion, and the Court of Appeal affirmed, holding:

1. Futrell introduced no evidence to show that Payday controlled his wages, hours, or working conditions (Slip op. at 7);
2. One "exercises control over workers' wages" when it "has the power or authority to negotiate and set an employee's rate of pay, and not [merely when it] is physically involved in the preparation of an employee's paycheck (Slip op. at 7);
3. "There is no evidence in the current case Payday allowed Futrell to suffer work, or permitted him to work, because there is no evidence showing Payday had the power to either cause him to work or prevent him from working" (Slip op. at 8);
4. "Payday did not direct or supervise Futrell at the production sites" or meet any of the secondary indicia of employment (Slip op. at 8-9);
5. Payday did not employ Futrell under the FLSA "economic realities" test (Slip op. at 9-10).
6. Payday was not estopped from denying that it employed Futrell "because, even accepting Futrell's evidence that people affiliated with Payday made statements indicating that he was a Payday employee, there is no substantial evidence showing that Futrell did any act - e.g., worked on the side apart from his police officer position - only because Payday made such statements." (Slip op. at 11).

The opinion is available here.

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 op.at 34. To “engage,” in this definition, means “to create a common law employment relationship.” Slip op.at 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. 

Review of the Los Angeles County Bar Association Thirtieth Annual Employment Law Symposium

The Los Angeles County Bar Association (LACBA) Labor and Employment Law Section put on its Thirtieth Annual Labor and Employment Law Sympoisum yesterday at the Biltmore Hotel, one of LA's real treasures.

I did not speak at this year's Symposium, so I had the opportunity to relax and watch other people do the hard work. I also had a great opportunity to meet new people and catch up with others I have not seen in a while. This symposium draws a top notch group of plaintiffs' and defense counsel, professional neutrals, and judges. It's really a Who's Who of the Southern California employment law community.

The day started with recent developments, moderated by Michael Robbins, with Gina Browne and Tracey Kennedy. I follow the new cases very closely and was familiar with the material, but I enjoyed the presentation - it was fun to hear Gina talking about all of the good new cases for plaintiffs - and I was particularly interested in Tracey Kennedy's comments on Martinez v. Combs, a case that we've been watching for several years. Tracey commented that if the plaintiffs lose Martinez [more on this below from the man I believe will author the Supreme Court's decision] she anticipates legislation to clarify California's definition of "employer." She also commented that defense attorneys should start counseling their clients on these issues sooner, rather than later. I appreciated Tracey's candor.

Daphne Aneet moderated a panel on employee privacy with Brenda Sutton-Wills and Irma Rodriguez Moisa. This is not a big area of interest for me, but I had the opportunity to have dinner after the seminar with Daphne and Irma, among others, and we had a great discussion of employment law, mediation, etc.

The next panel featured two A-list trial lawyers, Linda Miller Savitt and Dan Stormer, along with moderator Melanie Poturica and trial consultant Dan Gallipeau, Ph.D. They started with voir dire of a mock jury panel, then discussed the issues that arose. I am very engaged in trial practice, and Linda, Melanie, and The Two Dans offered a ton of useful insight. I just wish they had been given more time to do a more full voir dire. Linda and Dan will be demonstrating and discussing opening statements at the section's April retreat, and I would recommend their program to anyone who tries cases or wants to try cases.

The lunch keynote speaker was California Supreme Court Justice Carlos R. Moreno. Justice Moreno discussed a number of recent and pending cases, including Martinez v. Combs, which I blogged here. Justice Moreno said that Martinez will clarify issues left open by Reynolds v. Bement. This is no small thing. Many have argued that Reynolds settled the issues raised in Martinez. The Court itself questioned whether it should retain Martinez after Reynolds, and plaintiffs' counsel fought what seemed like an uphill battle to get the Court to retain it. I don't like to read too much into tea leaves, but this seems to me to be a positive comment for the plaintiffs in Martinez. Justice Moreno also said he anticipates the decision being issued before the 90-day deadline on June 3.

The next panel was on writs and appeals. Andrew Friedman moderated, with Court of Appeal Justice Laurence D. Rubin and attorneys Marc Poster and Stuart Esner. The program was well done, but they focused largely on preserving the record on appeal, and I have to say that they would have engaged the audience more with greater focus on writs, since most attorneys do not try their cases, let alone file appeals.

Marcus McDaniel moderated a panel on pre-certification communications with putative class members. Aashsish Desai and Arthur Silbergeld argued hypothetical issues under California and federal law, and Judge William Highberger from LA's complex panel issued rulings. The panel did a good job covering the material in an engaging format.

At the same time, another panel discussed the use of neutrals. Julie Yanow moderated, and Will Harris, Kim Deck, and my law school classmate and friend Apalla Chopra spoke. Another good panel, although I found it a little odd that they included expert witnesses and workplace investigators in their definition of neutrals.

The last panel of the day was on e-discovery. Angela Robledo moderated, with Hon. Carl West, Heather Morgan, and Scott Leviant. Another good panel on an important topic. Heather seemed so earnest that I almost felt sorry for her, having to deal with all the unreasonable discovery requests from plaintiffs' counsel. [I must have been tired.]

JAMS hosted a cocktail reception after the symposium, which gave us all a great opportunity to mix and mingle with people from the other side of the employment bar, as well as judges and neutrals. After that, there was a dinner for speakers, moderators, and members of the Section's executive committee, including yours truly.

All in all, this was just a great event. Congratulations to everyone who worked so hard to make it a success. I am looking forward to the Section's retreat in Ojai in March.

Supreme Court to Hear Oral Argument on Martinez v. Combs

Martinez v. Combs has been on the Supreme Court's desk for more than five years. The Court just announced that it will hear oral argument on Tuesday, March 2, 2010, at 9:00 a.m., in San Francisco. See the Court's docket here. The Court states the issues presented as follows:

Petition for review after the Court of Appeal affirmed in part and reversed in part the judgment in a civil action. The court ordered briefing deferred pending decision in Reynolds v. Bement, S115823, which includes the following issue: Can the officers and directors of a corporate employer personally be held civilly liable for causing the corporation to violate the statutory duty to pay minimum and overtime minimum wages, either on the ground such officers and directors fall within the definition of "employer" in Industrial Welfare Commission Wage Order 9 or on another basis?

The real issue is this: when the Wage Orders say that an "employer" is "any person as defined in Section 18 of the Labor Code, 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," what does that mean, and what impact does that have on the enforcement of the wage laws in California?

Martinez is an extremely important case that we've been waiting on for a long time. Plaintiffs' counsel did a phenomenal job briefing it, and I am sure they will perform equally well in front of the Court. Assuming that the Court does not strain to mis-interpret the Wage Order, I look forward to a positive ruling that puts greater teeth into California's wage laws.

Ninth Circuit Decision on Individual Manager Liability Under FLSA

This case arises out of Nevada, but it has parallels in California law that make it worth reading. In Boucher v. Shaw (9th Cir. July 27, 2009), the Ninth Circuit looked at whether an employer's individual managers could be held liable for unpaid wages under Nevada law or the Fair Labor Standards Act (FLSA). The Ninth Circuit certified the first issue to the Nevada Supreme Court, which held that the managers could not be held liable under Nevada law. The Ninth Circuit held that the managers could be held liable under FLSA.

Plaintiffs sued three individuals: the employer's chairman and CEO; the CFO; and the person responsible for handling labor and employment matters. Between them, the CEO and CFO owned 100% of the employer. The plaintiffs alleged that each defendant had custody or control over the “plaintiffs, their employment, or their place of employment at the time that the wages were due.” The District Court granted the individuals' motions to dimiss, and the plaintiffs appealed.

The Ninth Circuit reversed and remanded. First, the Court noted that the FLSA defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee . . . .” 29 U.S.C. § 203(d). Citing cases going back to Rutherford Food Corp. v. McComb, 331 U.S. 722, 730 (1947), the Court then noted:

[T]he definition of “employer” under the FLSA is not limited by the common law concept of “employer,” but “ ‘is to be given an expansive interpretation in order to effectuate the FLSA’s broad remedial purposes.’ ” The determination of whether an employer-employee relationship exists does not depend on “isolated factors but rather upon the circumstances of the whole activity.”

***

Where an individual exercises “control over the nature and structure of the employment relationship,” or “economic control” over the relationship, that individual is an employer within the meaning of the Act, and is subject to liability.

With these principals in mind, and accepting the complaint's allegations as true, the Court held that the District Court erred in granting the motions to dismiss. The Court further held that the employer's bankruptcy filing had "no effect" on the claims against the individual managers under the FLSA, a point that the individuals tried to rely on. "[T]he managers are independently liable under the FLSA, and the automatic stay has no effect on that liability."

Given Reynolds v. Bement and its progeny and the fact that we still don't have a ruling in Martinez v. Combs, employees left holding the bag when their employer goes out of business or files for bankruptcy should carefully consider whether the employers individual managers can be held liable under the FLSA.