2014 gave more clarity on liability for wage violations

While most employees can answer the question, "Who do you work for?" the question of who is a liable employer under California wage laws hasn't been so simple. However, if recent trends continue, finding the answer will be easier.

Determining who may be accountable for wage violations affects workers across many sectors of the economy, and many businesses and their leaders. Consider these examples:

A large company considers its drivers independent contractors. The company has policies governing the drivers' uniforms, their vehicles, the way they are dispatched, and reserves the right to terminate the drivers' contracts at any time. Are the drivers properly classified as independent contractors? Assume each driver is instead a "franchisee," and employs drivers himself. Are workers for particular franchisees also employees of the large company that is the ultimate franchisor?

A large corporation has many subsidiaries and takes a "shared services" approach, providing human resources, payroll and other key employment-related functions for its subsidiaries. Yet, the corporation takes the position that workers at each subsidiary can only collect (or litigate against, or certify a class) as to the particular subsidiary where each worker spends her days. Is the large corporation also potentially susceptible for wage claims in its subsidiaries, or a company-wide class action that affects all of its subsidiaries?

A big business uses small (potentially insolvent) janitorial services labor contractors to staff its cleaning jobs, and these personnel are receiving less than the minimum wage. To what extent is the big business on the hook for the actions of its labor subcontractors?

A closely held restaurant employs 50 people. It is incorporated, with the sole owner as its lone officer and director. The owner has ultimate authority over hiring and firing workers and - though he has some subordinate managers - has made policy statements from time to time. Can the owner be held personally liable for wage violations under California or federal wage laws as a joint employer?

This year, California's courts and legislature have helped get closer to answers regarding many of these questions.

Tread carefully

The Borello decision defined an independent contractor. S. G. Borello & Sons Inc. v Dept. of Industrial Relations, 48 Cal. 3d 341 (1989). In response to abuses of the designation, the state Legislature recently added civil and criminal sanctions for willful misclassification - 2011's Senate Bill 459, which added Labor Code Sections 226.8 and 2753. California's Employment Development Department has been taking a hard line against independent contractor designations where employers have not paid unemployment insurance or other taxes.

In Ayala v. Antelope Valley Newspapers Inc., 59 Cal. 4th 522 (2014), the state Supreme Court made it easier to certify California class actions based upon independent contractor misclassification. The Supreme Court held that the trial court erred in denying certification of a class of delivery workers who sued a daily newspaper which had classified them as independent contractors. The trial court found too many individual inquiries were necessary into the way different newspaper delivery workers operated.

But the trial court in Ayala missed the crux of the inquiry: Whether a common law employer-employee relationship exists turns foremost on the degree of a hirer's right to control how the end result is achieved. Because of the preeminence of the right to control test under Borello, as reinforced by Ayala, common proof - e.g., what rights are reserved to the employer in the governing contracts - will often answer the independent contractor versus employee inquiry. Courts likely will certify more independent contractor misclassification class actions.

The 9th U.S. Circuit Court of Appeals applied California independent contractor law, applying the "right to control" test, in Ruiz v. Affinity Logistics Corp., 754 F.3d 1093 (9th Cir. 2014) (decided shortly before Ayala), and Alexander v. FedEx Ground Package System Inc., 765 F.3d 981 (9th Cir. 2014) (applying Ayala). The Ruiz decision previews Ayala by focusing on the right to control, rejecting an independent contractor classification scheme. Alexander stands for the proposition that if an employer's workforce is doing the work of employees, the employer cannot avoid complying with the Labor Code's employee protections by artful contract language. The concurrence quoted Abraham Lincoln: "If you call a dog's leg a tail, how many legs does a dog have? .... Four. Calling a dog's tail a leg does not make it a leg."

One caveat: Where a business goes one step further than independent contractor classification, and has franchisees, the franchisor's vicarious liability for a franchisee's employment practices may be limited to situations where it maintains "a comprehensive and immediate level of 'day-to-day' authority over matters such as hiring, firing, direction, supervision, and discipline of the employee." Patterson v. Domino's Pizza, 60 Cal. 4th 474, 499 (2014) (in a Fair Employment and Housing Act harassment case).

The growing joint-employer standard

Workers have found it difficult to prove Labor Code Section 2810 liability, regarding contracts for insufficient funds. They rarely have access to evidence showing their employer-subcontractors paying substandard wages entered into contracts which the primary contractors knew contained insufficient funds to cover minimum wages. This year, the Legislature responded, and Gov. Jerry Brown approved Assembly Bill 1897, creating Labor Code Section 2810.3. It makes businesses whose workers are supplied by labor contractors jointly responsible for wage payments.

This year may also have doomed the use of parent/subsidiary and holding company relationships between corporate entities to create a loophole in California's wage laws. In Castaneda v. Ensign Group Inc., 229 Cal. App. 4th 1015 (review filed Oct. 28, 2014), workers brought suit against a parent company owning a "cluster" or "portfolio" of companies providing nursing care, including the entity where the named plaintiff worked. The parent company argued that because the subsidiary was registered as an independent entity, and hired and paid the plaintiff and set his schedule, only the subsidiary could be held liable for wage violations as the plaintiff's "employer." But the Court of Appeal held that a jury could conclude that the parent company was the plaintiff's joint employer. Building on Martinez v. Combs, 49 Cal. 4th 35 (2010), as well as the Court of Appeal decision in Guerrero v. Superior Court, 213 Cal. App. 4th 912 (2013), the Castaneda court explained that an "entity that controls the business enterprise may be an employer even if it did not 'directly hire, fire or supervise' the employees." Quoting Martinz, Castaneda emphasized: "The basis of liability is the owner's failure to perform the duty of seeing to it that the prohibited condition does not exist."

Following Castaneda, individual owners - not just corporate owners - may be liable as joint employers for wage violations, where they fulfill one of the tests outlined by the Martinez, Industrial Welfare Commission-inspired framework ("employ" means either: to control wages, hours, and working conditions; to suffer and permit to work (hire and fire); or to engage under the common law definition). California courts have not yet issued published authority on this specific point - Bain v. Tax Reducers Inc., 161 Cal. Rptr. 3d 535 (2013), was ordered depublished by the state Supreme Court after holding with scanty analysis that an individual owner could not be a joint employer.

In Dynamex Operations West Inc. v. Superior Court, 230 Cal. App. 4th 718 (2014), the Court of Appeal reiterated the broadly protective joint employer standard under the California Labor Code, invoking Martinez and the IWC wage orders. "Martinez, in effect, fills the gap between the common law employer-focused approach and the need for a standard attuned to the needs and protection of employees. As the court recognized, the IWC wage orders provide an employee-centric test gauged to mitigate the potential for employee abuse in the workplace."

Federal courts have been similarly "employee-centric" in applying California law - for example, in Carrillo v. Schneider Logistics, a Wal-Mart distribution subcontractor agreed to pay $21 million after Wal-Mart was found potentially liable for Schneider's wage violations as a joint employer under both California and federal law. 2014 WL 1893956 (C.D. Cal. Jan. 14, 2014).

Going forward, businesses and their leaders, when they control - or have the right to control - wages, hours, and working conditions - or the right to hire and fire workers - should take measures to ensure that workers are being paid in accordance with California law - or face costly consequences.