Who's an 'employee' under the Labor Code still uncertain

In Martinez v. Combs, 49 Cal. 4th 35 (2010), the state Supreme Court addressed the issue of who is an employer for claims made under the California Labor Code and wage orders. Specifically, the court held that where a plaintiff asserts a claim under a Labor Code section and a complementary wage order, the wage order's definition is controlling. The impact of Martinez is significant as the wage order's definition of "employer" is broader than the traditional common law test for employment.

Under the wage order there are three alternative definitions of who is an employer. An employer is one who: (1) exercises control over the wages, hours or working conditions of employees; or (2) suffers or permits employees to work; or (3) engages employees thereby creating a common law employment relationship. Martinez's broad definition arguably gives employees the ability to seek recovery against parent corporations, owners of closely held businesses, and other entities or persons not traditionally considered employers.

Martinez did not address the issue of who is an employee under the California Labor Code. Under the traditional common law test, the existence of an employer-employee relationship turns foremost on the degree of a hirer's right to control how the end result is achieved. S.G. Borello & Sons Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, 350 (1989). The finder of fact may also look to various secondary factors which also may evince an employment relationship, including the skill required in the particular occupation and the hirer's right to terminate the relationship at will.

Under the logic of Martinez, however, where a person asserts a claim under the Labor Code and a complementary wage order, the order's definition of employee would control. Martinez held that the state Legislature granted the Industrial Welfare Commission (IWC) broad authority to regulate the hours, wages and labor conditions for workers in California. Significantly, the IWC was given the authority to issue wage orders to effect these duties. Further, Martinez recognized that the courts must give extraordinary deference to the IWC's authority and its orders.

This was reinforced by the state Supreme Court in Brinker Restaurant Corp. v. Sup. Ct., 53 Cal. 4th 1004 (2012), where the court explained that wage orders are to be accorded the same dignity as statutes and that the wage orders were designed to augment the statutory framework provided by the Labor Code to afford workers greater protections. Thus, just as Martinez found that it makes "eminently good sense" that the IWC would define who an employee is for Labor Code claims, Martinez and Brinker would indicate that it also logically follows that the IWC had broad authority to define who is an employee and to ensure that those employees are protected by its wage orders.

It is almost certain that if the wage order's definition of employer and employee is controlling, this will make it easier for persons who are not considered traditional employees to assert Labor Code claims. The various wage orders define an employer as anyone "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." They further define "employ" as to "engage, suffer, or permit to work." Thus, just as with the test for who is an employer, the definition to employ would also consist of three alternative definitions, namely: (1) to exercise control over the wages, hours or working conditions; or (2) to suffer or permit to work; or (3) to engage, thereby creating a common law employment relationship. Each of these definitions could be used where appropriate.

"Exercises control over wages, hour or working conditions." Under this definition, a plaintiff need only show that a defendant had the right to control their wages, hours or working conditions to show that they were an employee. This appears to be a broader definition than Borello's traditional common law test and would make it easier for purported independent contractors to prove that they are employees.

"Suffers or permits to work." This definition appears to be the broadest of the three. Martinez explained that this standard was intended to reach irregular working arrangements that a business owner "might otherwise disavow with impunity."

"To engage, thereby creating a common law employment relationship." This definition incorporates the common law test for employment. Under this test, whether an employment relationship exists is determined by whether the defendant had the right to control the manner and means of how the plaintiff performed his or her work, and the finder of fact may also look to various secondary factors which can serve as indicia of an employment relationship.

The IWC alternative definitions are very broad, and Martinez specifically recognized that the wage orders were designed to reach irregular working arrangements that fall outside of the common law and that the IWC had the power to define the employment relationship as necessary to prevent evasion and subterfuge and ensure the protection of the state's workers.

In the state Supreme Court's recent decision in Ayala v. Antelope Valley Newspapers Inc., 2014 DJDAR 8620 (June 30, 2014), the court declined to answer "the question [of] what application, if any, the wage order tests for employee status might have to wage and hour claims," instead choosing to "leave [it] for another day." There can be little doubt, however, that plaintiffs in cases involving the issue of independent contractor misclassification will assert that the wage order's definition controls. They will do this because the wage order's definition is broader than the traditional common law test and, in class actions, it will undoubtedly be easier to show that common issues predominate. If the Supreme Court ultimately does hold that the wage order is controlling it will have a tremendous impact for persons alleging that they have been misclassified as independent contractors.

This issue has become a hot topic in California. For example, truck drivers who haul commercial goods from the ports of Los Angeles and Long Beach to retail warehouses have recently filed claims with the labor commissioner alleging that the trucking companies they work for have wrongly classified them as independent contractors in order to avoid paying them overtime and providing them with other labor law protections. Further, the state and federal government are also particularly concerned with such misclassifications as according to a 2012 Treasury Department study, a company can save roughly $4,000 per misclassified worker per year by not paying unemployment taxes, Social Security taxes, and Medicare taxes.

It will be interesting to see how the issue of who is an employee for purposes of asserting claims under the Labor Code will play out in the trial courts and the appellate courts. Some have already begun to grapple with this issue. See Bradley v. Networkers Int'l LLC, 211 Cal. App. 4th 1129, 1146 (2012). Hopefully, the state Supreme Court will soon have the opportunity to address this issue and provide a definitive answer.