The Need for Clarity on Joint Employer Liability for Wage Claims Against Owners of Closely-Held Companies

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The Need for Clarity on Joint Employer Liability for Wage Claims Against Owners of Closely-Held Companies

The Need for Clarity on Joint Employer Liability for Wage Claims Against Owners of Closely-Held Companies

Workers must answer a threshold question in any employment lawsuit: who is their legal employer? Frequently, several people or companies control various aspects of a worker’s employment. For example, Company A might send a worker her paycheck and create the policies that affect the worker’s compensation, while Company B might set the hours of her employment while the owner of Company B controls the worker’s workplace conditions, such as how the worker performs her work.

Currently, the case law is unclear on how a court should determine joint employer status, and thus who can be held accountable.  However, employees and their advocates faced with such a situation should argue that the worker is employed by joint employers, which means that both Companies A and B may be held liable if the worker’s rights are violated. In addition, the owner of Company B who controls the worker’s workplace conditions may also be liable as a joint employer.

The tests for joint employer status appear to vary depending on the causes of action.

Labor Code Claims

In Martinez v. Combs, the California Supreme Court provided some clarity on who should count as a joint employer when workers assert a wage claim by adopting the definition of the “employment relationship” promulgated by California’s Industrial Wage Commission (IWC). Martinez, 49 Cal.4th at 52. The IWC defines “to employ” as satisfying one of the following:

(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.

Id. at 64.

While Martinez provided some clarity on how to determine if an individual is an employer, it also created ambiguity because the court excluded corporate agents merely acting within the scope of their agency from liability for violations of Labor Code § 1194 (minimum wage and overtime violations). Id. at 66. This means that if plaintiffs attempt to sue both the company that employed them and also a manager strictly acting as an agent of the employer company, the individual agent likely would not be personally liable for minimum wage or overtime violations.

The Martinez court did not address whether a sole owner of a closely held entity is insulated against liability. Reynolds v. Bement, 36 Cal. 4th 1075, 1082 (2005), overruled by Martinez to the extent it relied solely upon agency theory, instead of the three-prong IWC test, involved corporate agents rather than a sole owner.

The control and suffer/permit tests embraced by Martinez raise the possibility that individual owners can now be liable for Labor Code, minimum wage and overtime violations, where they are involved hands-on in running their business, hiring/firing, setting wages, making policies, etc.

No California appellate court has yet addressed the issue, but Bryan Schwartz Law, P.C. has recently filed a writ on the issue of joint employer liability for Labor Code violations to the Court of Appeal.

Federal courts deciding the issue have split. Compare Garcia v. Bana, C 11-02047 LB, 2013 WL 621793 (N.D. Cal. Feb. 19, 2013) with Guifu Li v. A Perfect Day Franchise, Inc, 281 F.R.D. 373, 396 (N.D. Cal. 2012). Stay tuned! For more information about the 2010 Martinez decision, please read our blog article when it was first decided here.

Private Attorneys General Act of 2004 (PAGA)

The Private Attorneys General Act of 2004 (PAGA) allows workers to collect civil penalties for violations of the California Labor Code. Again, workers with multiple supervisors, perhaps from different companies, must determine whom they can hold accountable under PAGA. The text of the statute provides that “[a]ny employer or other person acting on behalf of an employer who violates, or causes to be violated, a section of this chapter or any provision regulating hours and days of work in any order of the Industrial Welfare Commission…” will be subject to civil penalties. Cal. Lab. Code § 558(a) (West). In Reynolds, Justice Moreno, in his concurrence, raised the possibility that the then-new PAGA statute would permit individual liability for corporate officials, saying, “the Private Attorneys General Act…which authorizes civil penalties for violations of the wage laws that include unpaid wages from “any employer or other person acting on behalf of an employer,” a phrase conceivably broad enough to include corporate officers and agents in some cases.” Reynolds v. Bement, 36 Cal. 4th 1075, 1094 (2005) abrogated by Martinez v. Combs, 49 Cal. 4th 35 (2010).

A federal court in McDonald v. Ricardo’s on the Beach, Inc., concluded that there was a genuine issue of material fact as to whether a defendant “violate[d], or cause[d] to be violated,” Labor Code 510 (overtime wages) on the basis that he owned and operated the company which issued checks to the plaintiffs, signed the checks that plaintiffs received, and occasionally brought the checks to the workplace to be distributed. McDonald v. Ricardo’s on the Beach, Inc., CV 11-9366 PSG MRWX, 2013 WL 153860 at *4 (C.D. Cal. Jan. 15, 2013). McDonald relied upon prior federal precedent in Ontiveros v. Zamora, which reached the same conclusion. CIV S-08-567LKK/DAD, 2009 WL 425962 at *6 (E.D. Cal. Feb. 20, 2009).

Though California appellate authorities have not yet reached the issue, workers should argue that PAGA extends liability for Labor Code violations beyond mere corporate entities to individual agents and owners, depending on the circumstances, because PAGA explicitly creates liability for a “person acting on behalf of an employer who violates, or causes to be violated” a section of the Labor Code.

Business and Professions Code § 17200 et seq.

California’s Business and Professions Code § 17200 et seq. allows workers to recover unpaid wages and other property unlawfully taken from them by their employer. Section 17200 provides that a “person” shall be required to “restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.” Bus. and Prof. Code § 17203. “Person” includes “natural person.” Cal. Bus. & Prof. Code § 17201 (West). This broad definition can also extend to personal liability for individual owners for wage violations. See, e.g., Troyk v. Farmers Grp., Inc., 171 Cal. App. 4th 1305, 1340 (2009) (“The UCL ‘requires only that the plaintiff must once have had an ownership interest in the money or property acquired by the defendant through unlawful means.’”); Aleksick v. 7-Eleven, Inc., 205 Cal. App. 4th 1176, 1185 (2012) (UCL claims under § 17200 are derivative of wage claims).

California’s appellate courts should confirm soon that owners of closely held corporations may be held personally liable for a variety of wage claims under appropriate circumstances. At stake in many cases is whether or not workers cheated of their wages will be able to recover at all. Often the individual owners are the only ones with resources to make good on their company’s debts. They should not be able to hide behind corporate formalities in dodging wage laws.

If you question why you are not receiving compensation to which you believe you are entitled, and do not know who to hold accountable, and you want advice from an attorney, please contact Bryan Schwartz Law, P.C. today.

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