Tuesday, May 22, 2018

Epic Fail: U.S. Supreme Court Rules that Employers May Require Employees to Waive Right to Bring a Class Action as a Condition of Employment


On Monday, the Roberts Court took another significant step in its ongoing project to hobble class actions and impose barriers to employees seeking redress against their employers by holding that class action waivers within arbitration agreements do not violate the National Labor Relations Act (“NLRA”). The employees, seeking to recover unpaid wages on behalf of themselves and other employees under the Fair Labor Standards Act (“FLSA”), had argued that the NLRA’s Section 7, which guarantees employees’ “right to self-organization, to form, join, or assist labor organizations, to bargain collectively . . . , and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection,” prohibits employers from requiring that employees agree to individual, binding arbitration as a condition of continued employment.

The case, Epic Systems Corp. v. Lewis, comes on the heels of series of Roberts Court cases expanding the ability of companies to impose individual arbitration on their employees and customers, thus preventing employees and consumers from filing lawsuits in open court or filing class actions anywhere. Bryan Schwartz Law has written extensively about the Court’s decisions expanding the Federal Arbitration Act (“FAA”) at the expense of the rights of employees and consumers: here, here, here, here, here, and here. In 2001, the Rehnquist Court ruled in Circuit City Stores, Inc. v. Adams that the FAA’s express exclusion of “the contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” meant to remove only the employment disputes of transportation workers from binding arbitration, notwithstanding the broad “any other class of workers” language in the Act. Then, in 2011, the Roberts Court approved of class action waivers in consumer arbitration contracts in AT&T Mobility v. Concepcion.

The Court’s opinion in Epic Systems, while hardly a surprise given this Court’s expressed disregard for the rights of workers and consumers in its recent arbitration jurisprudence, is notable for the sheer level of its intellectual dishonesty. Justice Gorsuch, writing for the five-Justice majority, feigns confusion as to why the National Labor Relations Board did not address the apparent conflict between the NLRA (enacted 1935) and the FAA (enacted 1925) until 2012, when the obvious answer is that no one thought that the FAA had anything to do with employment disputes in the late 1930s when Congress passed both the NLRA and the FLSA, which permits employees to bring “collective actions” to recover unpaid wages.

Gorsuch counsels judicial restraint in admonishing the employees for asserting a conflict between the FAA and NLRA – “This Court is not free to substitute its preferred economic policies for those chosen by the people’s representatives” – but fails to mention that the current regime making compulsory, pre-dispute arbitration a ubiquitous requirement for employees and consumers is a recent, judicial invention. Given the low value of most individual employment and consumer claims, the right-wing innovation is tantamount to a get-out-of-jail-free card (or out-of-liability-free card, at least) for companies engaging in wage theft and other insidious business practices, undermining fair competition with companies that play by the rules.

Completely absent from Court’s opinion is any discussion or concern as to how forced individual arbitration undermines the substantive rights enshrined in laws like the FLSA and Title VII of the Civil Rights Act of 1964 (prohibiting employment discrimination). The success of these Acts has depended greatly on the ability to bring group actions challenging policies and practices that injure large numbers of workers. For instance, the landmark 1971 discrimination case Griggs v. Duke Power Co. involved a class of African-American employees who successfully challenged high school diploma and IQ-testing requirements that were unrelated to their jobs, but had the effect of keeping African-Americans out of the most desirable positions. In Gorsuch’s world, these sorts of fundamental statutory protections must give way to the Roberts Court’s arbitration regime, under which its expansive reading of the FAA trumps all.

Justice Ginsburg penned a fiery and forceful dissent, joined by Justices Breyer, Sotomayor, and Kagan, in which she blasts the majority opinion for trampling on the ability of employees to exercise their statutory rights. Ginsburg traces the history of the Court’s labor jurisprudence, noting that New Deal legislation like the NLRA and the FLSA arose from an understanding that individual employees lacked the bargaining power to demand fair working conditions, and that only through acting collectively could employees “match their employers’ clout in setting the terms and conditions of employment.” In that sense, the majority’s opinion, premised on the fanciful notion that most employees have any ability to negotiate when their employers demand they sign an arbitration agreement, reflects a return to the pre-New Deal Lochner era, when the Court routinely struck down worker protections as violating the supposed freedom to contract.

Ginsburg further notes that the result of Epic Systems “will be the underenforcement of federal and state statutes designed to advance the well-being of vulnerable workers.” Low-wage employees, especially, may be reluctant to take on their employers alone for fear of retaliation, since the costs and risks of proceeding individually often dwarf the potential recoveries. Of course, this is not an accidental outgrowth of the Roberts Court’s arbitration jurisprudence, but its central design: to insulate companies from liability for harm to their employees and customers.

After Epic Systems, employees, consumers, and those who advocate on their behalf have an increasingly limited toolbox to confront corporate abuse on a class-wide basis, so long as employers can demand individual arbitration. At this point, the only comprehensive solution is likely a legislative one, highlighting the importance of who Americans elect to the next Congress. When most Americans know victims of corporate overreaching – a day we fear is coming soon – the tide will turn, and the Roberts Court will be seen in its true light, on the wrong side of history.

Monday, April 30, 2018

California Supreme Court Narrows Application of "Independent Contractor" Status


Today's ruling in Dynamex v. Superior Court (S222732) (April 30, 2018) is an 85-page dissertation, authored by the Chief Justice, for a unanimous court, meant to limit abuse of the independent contractor designation in California. Read the decision here

In an era when the United States Supreme Court’s majority increasingly buries its head in the sand and resorts to overly formalistic readings, tilting the scales of justice toward exoneration of unscrupulous businesses, it is refreshing to read Dynamex. The California Supreme Court consistently keeps front and center the unequal bargaining power real California workers experience when going to work. Dynamex helps restore balance, placing the burden where it should be – on businesses, if they hope to show that their workers, or any of them, are independent contractors, not subject to the protection of the Wage Orders that enforce the California Labor Code. Dynamex is a win also for businesses that play fair, because they will not have to compete against others cutting corners on wages, and for the general public, because the Wage Orders and Labor Code are fundamentally designed to protect the health and welfare of everyone in California workplaces. (Slip Op. at 58-60).

In the first pages of Dynamex, the Court notes a U.S. Department of Labor report finding that the distinction between independent contractors and employees is the most important factor in determining whether a worker will receive labor, employment, and other statutory protections. Employers hold back billions of dollars a year in taxes based upon improper independent contractor designations, and millions of workers suffer the consequences. (Slip Op. at 2). 

The workers in Dynamex argued that the same tests determine whether supposed independent contractors are actually employees entitled to Wage Order protections, as would determine whether two entities are joint employers - namely, the tests in Martinez v. Combs (2010) 49 Cal.4th 35, 64: whether an alleged employer has a) control over wages, hours and working conditions, or; b) suffers or permits work to occur; or c) engages a worker to perform work. Dynamex upheld the Court of Appeal decision, holding that the trial court did not err in concluding that the "suffer or permit to work" definition of "employ" contained in the Wage Orders may be relied upon in evaluating whether a worker is an employee. (Slip Op. at 46-47). The company had argued that courts could only use the old independent contractor test from S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello), but the Court of Appeal and Supreme Court rejected this view. (Slip Op. at 6-7, 46).

Instead, the Court held that, in evaluating the “suffer or permit” test under Martinez, for the purpose of determining independent contractor versus employee status, courts should apply the “ABC test.” Though, as of today, I find no state cases prior to Dynamex in California that invoked the ABC test, I predict there will be hundreds of “ABC test” decisions in the months and years to come.
 “Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.” (Slip Op. at 7). The Court repeatedly emphasized that the it is an alleged employer’s burden to prove independent contractor status, and that doing so requires meeting all three prongs of the ABC test. (Slip Op. at 64, 66-68).

The Court recommended that, if deciding B or C is easier than A (as will usually be the case), then a court should begin by deciding B or C – since all three prongs must be met. (Slip Op. at 76). In other words, if a delivery driver without an independent delivery business is being classified as an independent contractor by a delivery company – a court likely need go no further, because the company will have failed prongs B and C.

More analysis of Dynamex to come...

If you believe you are misclassified as an independent contractor and should be paid as an employee, contact Bryan Schwartz Law.

Monday, April 16, 2018

Sixth Circuit Extends Title VII Protection to Transgender Employees

Joining the Second and Seventh Circuits, the Sixth Circuit issued a decision last month that extended Title VII protection for individuals who are transgender or transitioning in EEOC v. R.G. & G.R. Harris Funeral Homes, Inc., 884 F.3d 560 (6th Cir. 2018). 

The case involves Aimee Stephens, who had worked for nearly six years as a funeral director at R.G. and G.R. Harris Funeral Homes ("Funeral Home") when she informed the funeral home's owner that she is a transgender woman and intended to start dressing in appropriate business attire for women as part of her transition. The owner of the funeral home fired Stephens because of Aimee's transgender status, claiming that he would violate God's commands if he permitted funeral directors to deny their sex while representing the funeral home and would render him complicit "in supporting the idea that sex is a changeable social construct rather than an immutable God-given gift."

After her termination, Stephens filed a charge of discrimination with the EEOC. The EEOC determined that there was reasonable cause to believe that the Funeral Home fired Stephens due to her sex and gender identity. The EEOC also found the Funeral Home to be in violation of Title VII because it provided male employees with a clothing benefit which was denied to females. After the EEOC's informal conciliation process failed, the EEOC filed a complaint in federal court against the Funeral Home on September 25, 2014.

After the parties cross-moved for summary judgment, the District Court determined that there was direct evidence to support Stephen's claim of employment discrimination on the basis of her sex. However, the Court nevertheless found in the Funeral Home's favor, concluding that the Religious Freedom Restoration Act (“RFRA”) precludes the EEOC from enforcing Title VII against the Funeral Home, as doing so would substantially burden the Funeral Home's religious exercise, and the EEOC had failed to demonstrate that enforcing Title VII was the least restrictive way to achieve its presumably compelling interest “in ensuring that Stephens is not subject to gender stereotypes in the workplace in terms of required clothing at the Funeral home.”

The EEOC timely appealed, and Stephens moved to intervene in this appeal on January 26, 2017, after expressing concern that changes in policy priorities within the U.S. government might prevent the EEOC from fully representing Stephen's interests in the case. Stephen's request was granted by the Sixth Circuit on March 27, 2017. 

On appeal, the Sixth Circuit overturned the district court, finding that Stephens was protected by Title VII because the Funeral Home's decision to fire Stephens necessarily implicated Title VII's proscriptions against sex stereotyping, which is already protected under the court’s precedent in Smith v. City of Salem, 378 F.3d 566, 573 (6th Cir. 2004) and Supreme Court precedent from Price Waterhouse v. Hopkins, 490 U.S. 228 (1989). As to the employer’s free exercise of religion defense, the Sixth Circuit reversed the district court’s decision, holding that forcing the funeral home to comply with Title VII did not meet the RFRA’s substantial burden requirement, in part because the funeral home could not rely on the presumed gender biases of its customers to establish a substantial burden on its free exercise of religion. The ruling affirms that transgender individuals are protected by federal sex discrimination laws, and that religious belief does not give employers the right to discriminate against them.


Tuesday, April 10, 2018

The Late, Great Judge Reinhardt’s Legacy: Employers can no Longer Consider Prior Salary History in Setting Workers’ Wages

Stephen Reinhardt, known as the “liberal lion” of the Ninth Circuit Court of Appeals since his appointment by President Jimmy Carter in 1980, died last month, after authoring one last decision for the ages.

Yesterday, the Ninth Circuit published posthumously Judge Reinhardt’s final opinion, to combat the gender wage gap, by holding “that prior salary alone or in combination with other factors cannot justify a wage differential.” Rizo v. Yovino, No. 16-15372, Slip Op. at 5 (9th Cir. Apr. 9, 2018), available here. Bryan Schwartz Law previously blogged about the Ninth Circuit’s earlier decision in Rizo here.

            Despite decades of education, litigation, and mobilization to make the promise of equal work for equal pay a reality, the gender wage gap continues to disadvantage millions of women in our country, who earn only 79% of what men earn.[1] Women lose $33 billion per year due to the wage gap.[2] Judge Reinhardt’s words in Rizo will  now be the fulcrum of the national discussion over this stubborn, glaring problem.

In Rizo, the facts are undisputed: a county school district paid a female math consultant less than comparable male workers for the same work. Slip Op. at 6. All things being equal, the county’s decision would be a textbook violation of the federal Equal Pay Act. But, the county attempted to justify its decision by reference to a statutory catch-all exception to the federal Equal Pay Act, which allows for wage differences between male and female employees based on a “factor other than sex.” In particular, the county argued that the female employee’s prior salary history was a factor not rooted in sex, and thus could justify paying the female employee less than comparable male employees for the same work. Id. at 7. The initial three-judge Ninth Circuit panel agreed, citing its past decision in Kouba v. Allstate Ins. Co., 691 F.3d 873, 878 (9th Cir. 1982), in which the court declined to create a strict prohibition against the use of prior salary.

Undeterred, the advocates for pay equality petitioned for the Ninth Circuit to re-hear the case en banc,[3] which the court granted. After a second hearing, the en banc Ninth Circuit court rejected the county’s argument because an employer’s decision to rely on an applicant’s prior salary history to set that applicant’s present salary inevitably imports and thereby perpetuates unlawful disparities in pay from the applicant’s prior position. Id. at 28 (“Prior salary is not job related and it perpetuates the very gender-based assumptions about the value of work that the Equal Pay Act was designed to end. This is true whether prior salary is the sole factor or one of several factors considered in establishing employees’ wages.”).[4] This runs counter to the purpose of the Equal Pay Act, which was enacted to “to put an end to the ‘serious and endemic problem of employment discrimination in private industry’ and to carry out a broad mandate of equal pay for equal work regardless of sex.” Id. at 10 (quoting Corning Glass Works v. Brennan, 417 U.S. 188, 195 (1974)).[5]

Notably, in holding that employers “may not use sex directly or indirectly as a basis for establishing employees’ wages,” including using employees’ salary histories to set wages, the Ninth Circuit overruled its prior decision in Kouba. Id. at 23. This outcome not only paves the way for more effective enforcement of the Equal Pay Act’s mandate – equal pay for equal work, not equal salary histories – but also serves as a reminder that equity can sometimes only be achieved through fearless, persistent advocacy, and jurists like Stephen Reinhardt, who demonstrate the courage to pursue justice.

Bryan Schwartz Law congratulates Jennifer Reisch and Jessica Stender at Equal Rights Advocates, our co-counsel in a prior sex discrimination case, and Mariko Yoshihara of the California Employment Lawyers Association, along with the many other advocates for wage equality who brought about this momentous victory!




[1] See https://www.equalrights.org/fairpay/
[2] Id.
[3] Most cases reviewed by a federal appellate circuit court are heard by fewer than the full number of judges sitting on a particular circuit court, usually a three-judge panel. However, parties may request that all judges sitting on a given federal circuit court, like the Ninth Circuit, re-hear their case because one or more parties believes the three-judge panel ruled incorrectly.
[4] The en banc court emphasized that the “factor other than sex” exception must be “limited to job-related factors,” not business reasons such as whether an employer could get away with paying a female worker less than male workers because the female worker was paid less at her previous job. Id. at 25 (“[U]sing the word “business” risks conflating a legitimate factor other than sex with any cost-saving mechanism. The Supreme Court and Congress have repeatedly rejected such an interpretation of the fourth exception.”).
[5] The en banc court also supported its decision with the plain text of the statute, and the legislative history of the Equal Pay Act, including specific debates relating to the catch-all exception at issue in Rizo.

Friday, April 6, 2018

Revisiting Evidentiary Standards in Gender Discrimination Class Actions

On Monday April 2, 2018, the U.S. District Court, Southern District of New York, excluded arbitrary expert testimony and accepted generalized proof of statistical evidence to grant, in part, Plaintiffs’ class certification motion in Chen-Oster, et al. v. Goldman Sachs, 2018 WL 1609267, at *1 (S.D.N.Y. Mar. 30, 2018).

The Class, consisting of approximately 2,300 female current and former Associates and Vice Presidents in the Investment Banking, Investment Management, and Securities Divisions of Goldman Sachs, are challenging the company’s practices of paying women less, giving them worse reviews, and passing them over for promotion. Specifically, Plaintiffs allege that Goldman’s “360 review” performance evaluation process, “forced ranking,” and “cross ruffing” (i.e., cross-checking procedure that involves teams of Goldman partners interviewing each other about potential candidates) are policies and practices that inherently discriminate against women, particularly when those policies and practices are exercised within a “boy’s club” culture, where for example, managers/decision-makers exclude women from events such as barbeques, drinks, and golf outings, hire scantily dressed female escorts to attend holiday parties, etc.

The Court first addressed Goldman Sachs’ attempt to use “experts” in the financial industry to explain custom and practice for evaluation and promotion; however, the Court rejected Goldman’s expert. In United States v. Dukagjini, 326 F.3d 45, 54 (2d Cir. 2003), the Second Circuit, interpreting the Daubert expert-certification approach and applying Rule 702, held that expert testimony should be excluded if the witness is not actually applying expert methodology. The Honorable Judge Analisa Torres, writing in Chen-Oster for the District Court, stated “[u]nder Daubert, the Court must exercise its gatekeeping function accordingly, and ‘exclude unreliable expert testimony and junk science from the courtroom.’” Chen-Oster2018 WL 1609267, at *8 (citing, inter alia, Almeciga v. Ctr. for Investigative Reporting, Inc., 185 F. Supp. 3d 401, 415 (S.D.N.Y. 2016)). Judge Torres went on to state, “[g]eneral knowledge about the financial services industry (or, indeed, uninformed speculation about Goldman Sachs) could hardly be relevant or reliable on the question of whether a statistician’s methodology is sound or supported.” Chen-Oster2018 WL 1609267, at *8. Judge Torres specifically cited SEC v. Tourre, 950 F. Supp. 2d 666, 677–78 (S.D.N.Y. 2013), in which the Court had excluded testimony because the expert’s knowledge and expertise was in “so broad a category as to become meaningless when particularized” to the issues of the case. Judge Torres, was emphatic: “Defendants cannot circumvent the requirements of Rule 702 and Daubert by labeling a statistical expert’s statistical exercises a ‘real world check.’ A wolf in sheep’s clothing is still a wolf.” Chen-Oster2018 WL 1609267, at *8.

The Court also, recognizing the realities of large class actions, allowed Plaintiffs to use “generalized proof” of statistical evidence to show causation prima facie that Goldman Sachs’ policies and practices have a disparate impact on women. Relying on Dukes v. Walmart, Goldman Sachs attempted to argue that individual managers applied Goldman’s practices in “highly individualized ways,” such that Plaintiffs could not show that Defendants used a “common mode of exercising discretion.” Id. at *12. But the Court “decline[d] to indulge in Defendants’ semantic somersaults.” Id. Hitting at the root, the District Court made clear that in Dukes the plaintiffs lost because they had not identified a “common job evaluation procedure.” Here, Plaintiffs did. Id.

Defendants also, relying on a disaggregated business unit argument, contended that gender disparities were the result of “anomalies specific to individual Business Units.” Id. at *14. However, the Court rejected this argument, reasoning that “business units” at Goldman Sachs were not fixed. Id. For years, Goldman had transferred business units to different divisions, and moreover, the personnel in those units regularly transferred to other units and/or divisions. Id. Ultimately, the Court found the Class expert’s cross-unit modelling of the correlation between the performance/promotion process and gender to be persuasive, as it controlled for, among other things, division, year, office, education, and experience. Id. at *15. The expert’s report thereby provided significant proof of commonality for the purposes of showing the disparate impact of Goldman Sachs’ practices on women.

The Court also certified the disparate treatment claim, but not based on the Goldman Sachs “boy’s club” culture. Interestingly, the Court applied a “statistics and anecdotal evidence” approach in which it considered internal complaints, external complaints, survey answers, emails, articles, business records, and declarations from class members to ground its disparate treatment analysis. While Courts may not be recognizing the “boy’s club” phenomenon as evidence in and of itself, they are putting the pieces together to show that misogynist attitudes and practices continue to pervade certain workforces and injure women’s careers.

Although Dukes still presents challenges, the Chen-Oster analysis is a boon to class certification in discrimination cases.

If you have experienced discrimination based upon your gender, and need help, contact Bryan Schwartz Law.



Tuesday, March 27, 2018

California Mandates Employers Display Transgender Rights Poster in Workplace

On October 15, 2017, Governor Brown approved SB 396, a law that requires California employers with 5 employees or more to display a poster about transgender employment rights in a prominent and accessible location in the workplace with other mandatory workplace notices.

California's Department of Fair Employment and Housing recently issued the new mandatory poster, which addresses key topics such as the right of employees to use restrooms, locker rooms, and other similar facilities corresponding to their gender identity and to dress in accord with their gender identity and expression.

California's Fair Employment and Housing Act (FEHA) prohibits employers from discriminating against any employee on the basis of race, religious creed, color, national origin, ancestry, physical disability, mental disability, medical condition, genetic information, marital status, sex, gender, gender identity, gender expression, age, sexual orientation, or military and veteran status.

The poster follows regulations developed by the Fair Employment and Housing Council that went into effect in July 2017. SB 396 also requires mandatory sexual harassment prevention to include a component regarding gender identity, gender expression, and sexual orientation for California employers with at least 50 employees.

If you feel you have been subjected to unlawful discrimination or sexual harassment in the workplace, please contact Bryan Schwartz Law today.

Monday, February 12, 2018

Joint Employer Bosses: California Appellate Ruling Reinforces Personal Liability for Perpetrators’ Violations of State Wage Laws

by Rachel Terp and Bryan Schwartz (This article, under a slightly different title, first appeared in the February 2018 edition of Plaintiff Magazine, in substantially similar form)

While grim efforts to narrow joint employer liability under federal employment and labor law have captured national headlines in 2017, [1] the year also ended with a California Court of Appeal decision on individual joint employer liability that reaffirms workers’ robust wage theft protections under California law. 

In Turman v. Superior Court (2017) 17 Cal.App.5th 969,  California’s Fourth District Court of Appeal, Division Three (in Orange County), held that a sole shareholder and president of a closely-held corporation may be personally liable in a lawsuit to recover overtime, meal and rest period premiums, tip compensation, and minimum wages under California law. Turman provides the first published interpretation of California Supreme Court’s marquee decision on the definition of an “employer” in California, Martinez v. Combs (2010) 49 Cal.4th 35, as it applies to personal, rather than corporate, liability. [2]

Federal and state laws have long recognized that more than one defendant may be liable as an employer of the same workforce. [3] Joint employer liability aims to protect workers from those that would exercise control over workers’ labor, but attempt to shirk responsibility for workplace violations by foisting sole liability elsewhere. By holding responsible all persons (individual and corporate) that control working conditions, each is incentivized to comply with labor and employment laws.

The availability of joint employer liability is a practical necessity in many wage and hour cases. When a plaintiff-side wage-and-hour attorney assesses whether to accept a case, after determining the alleged workplace violations are meritorious, the next question the attorney typically asks is, “Who’s the boss?” If no solvent party exists to pay damages and penalties, then obtaining a large verdict in even the most righteous case will not result in payment of the client’s judgment, and will do little to deter bad actors.

All too often in California, workers who bring legal claims for wage theft are unable to collect from the company that employed them [4] - even when one or more individuals responsible for the wage violations could afford to make the workers whole. Plaintiffs may name these individuals as defendants, but individual defendants historically relied on lack of specificity in the state’s jurisprudence to argue that they should not be personally liable. State and federal courts have been reluctant to find individuals personally liable for unpaid wages under California law.

I. Historic Statutory and Regulatory Authorities

California’s wage statutes have provided causes of action for a broad range of wage theft practices, largely without specifying who may be liable. [5] The Industrial Welfare Commission (“IWC”) has been defunded for years, but previously had been delegated authority over wage and hour practices in California, and its Wage Orders (regarding a host of industries) continue to have regulatory force. [6] The Wage Orders provide broad definitions of employer. [7] Each defines “Employer” as “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.” [8] Under the orders,“Employ” means “to engage, suffer, or permit to work.” [9]

The Unfair Competition Law (“UCL”), Business & Professions Code section 17200, et seq., at section 17201, has expressly included “natural persons” unjustly enriched (e.g., because they stole workers’ wages) among those who are liable for restitution. [10]

The Private Attorneys General Act (PAGA), Labor Code section 2698, et seq., has permitted recovery for civil penalties for wage violations, under Labor Code section 558, with liability extending to “[a]ny employer or other person acting on behalf of an employer.” See Thurman v. Bayshore Transit Mgmt., Inc. (2012) 203 Cal.App.4th 1112, 1148; see also Labor Code § 2699(b) (incorporating Labor Code § 18: “‘Person’ means any person, association, organization, partnership, business trust, limited liability company, or corporation.”). [11]

II. Reynolds Set Forth a Common Law Test

In Reynolds v. Bement (2005) 36 Cal.4th 1075 (later abrogated by Martinez, 49 Cal.4th 35), the Supreme Court considered whether, as a matter of first impression, individuals may be liable under section 1194. Plaintiff brought a class action against parent and subsidiary corporations as well as officers, directors, and shareholders of the companies, alleging all were joint employers. [12] The trial court sustained defendants’ demurrer regarding the individual defendants. The higher courts affirmed.

The California Supreme Court held that while a corporate defendant’s employer status is defined by the IWC wage order, individuals are subject to the common law definition of employer. [13] The Court observed that while the relevant IWC order’s definition of employer controlled, [14] the IWC order did “not expressly impose liability under section 1194 on individual corporate agents.” [15] The Court reasoned that absent a clear statutory directive, a common law definition of employer should apply. [16] Under “common law, corporate agents acting within the scope of their agency are not personally liable for the corporate employer’s failure to pay its employees’ wages.” [17]

Following Reynolds, many state and federal courts applying California law precluded wage relief against owners, officers and directors as a matter of course. [18]

III. Martinez Abrogated Reynolds with a Three Part Test Under the IWC Wage Orders

In Martinez, the Supreme Court abrogated Reynolds, redefining joint employer liability under the Labor Code. The Supreme Court held that the applicable IWC wage order, not the common law, defines the employment relationship. [19] The Court explained the legislature had delegated authority to the IWC over wages, hours, and working conditions. [20] The Court reasoned: “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.” [21]

Instead, the Supreme Court interpreted the IWC wage orders as incorporating the common law test into the IWC’s three-prong, disjunctive test for joint employment. To “employ” 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." [22]

The Supreme Court in Martinez, concluded: “In sum, we hold that the applicable wage order’s definitions of the employment relationship do apply in actions under [Labor Code] section 1194 [concerning overtime and minimum wage claims]. The opinion in Reynolds [citation], properly holds that the IWC’s definition of ‘employer’ does not impose liability on individual corporate agents acting within the scope of their agency. [Citation.] The opinion should not be read more broadly than that.” [23]

Despite Martinez setting a new course on the definition of “employer” in California wage law, with rare exceptions, [24] courts remained reluctant to find liability against an individual, harkening back to Reynolds [25] - until now.

IV. Turman Clarifies Martinez’s Application to Individual Defendants

The Turman decision finally provides clarity regarding who may be personally liable as an employer.

A. Trial Court Decision

The underlying case, originally filed in 2010, sub. nom. Quiles, et. al. v. Koji’s Japan, Inc. et al. (Orange Cnty. Sup. Ct.) Case No. 30-2010-00425532, was filed on behalf of low-wage restaurant workers at two restaurants. [26] Plaintiffs brought a class action lawsuit alleging wage theft against the closely-held corporation that owned the restaurants. [27] The restaurant’s sole shareholder, president, and director, Mr. Parent, closed the restaurants after the case was filed. [28] Though the restaurant-corporation’s bank accounts were drained of funds, Mr. Parent stipulated to a net-worth of over $10 million. [29] After the closures, the litigation focused on whether workers could recover their unpaid wages from Mr. Parent as a joint employer, or alternatively, from him and his other business entity as the restaurant-corporation’s alter egos. [30]

In 2015, after a bench trial on joint employer and alter ego liability, the trial court ruled that although Mr. Parent had “absolute control” over his restaurant business, and could be personally liable under the FLSA’s “economic reality test,” [31] Mr. Parent could not be a joint employer under California law, based on the Supreme Court’s ruling in Reynolds, which (the trial court held) survived Martinez. [32] The trial court reasoned that Reynolds was binding because it dealt with the application of joint-employer liability for officers, directors, and managers of a closely-held corporation, whereas Martinez dealt with corporate joint-employers. [33]

The trial court expressed concern that if it found Mr. Parent liable by virtue of his control as a sole shareholder and president of the restaurants, then all owners of closely-held corporations would be liable for wage violations. [34]

B. Appellate Decision

On November 7, 2017, the California Court of Appeal ordered the trial court to vacate its ruling on Mr. Parent’s joint employer liability (among other vacated rulings). The Court of Appeal held that a Mr. Parent’s status as a sole shareholder and president of a company cannot insulate him from wage and hour liability, if his actions meet any one of the three definitions of an employer as set out in Martinez. [35] The Court was careful to note that the IWC’s three-part test “incorporates the common law definition definition as one [of the three] alternative” definitions. [36]

The Court’s reasoning demonstrates that the joint employer inquiry for Mr. Parent should be no different than for a parent corporation. In reaching its’ decision, the Court analogized to two recent rulings involving corporate joint employers. See Castaneda v. Ensign Group, Inc. (2014) 229 Cal.App.4th 1015, 1017-1018 (“A corporation with no employees owns a corporation with employees. If the corporation with no employees exercises some control over the corporation with employees, it also may be the employer of the employees of the corporation it owns.”); Guerrero v. Superior Court (2013) 213 Cal.App.4th 912, 950 (“an entity that controls the business enterprise may be an employer even if it did not “directly hire, fire or supervise” the employees.”). [37]

The Court of Appeal found that Mr. Parent was not a removed sole shareholder and president who kept his hands off of the Koji’s restaurants’ operations. The Court pointed to trial court findings that Mr. Parent: “‘dominated and controlled’ Koji’s;’” “was the ‘big boss’ to Koji’s employees;” “‘had the ability to control [Koji’s], whether he chose to delegate that authority to managers or not;’” and exerted “‘actual control over the employees of Koji’s” when he “‘hired and fired’” non-exempt managers; instructed his managers to “get rid of” the original named plaintiff after she filed the lawsuit, resulting in her swift termination; and chose to lay off all employees by closing the restaurants. [38]

The Court of Appeal appropriately expressed the flip-side of the trial court’s concern - in light of courts’ duty to enforce the wage laws robustly, and the difficulty workers have collecting against closely-held companies. If Mr. Parent “was immune from [joint employer] liability liability, notwithstanding such activity, because he was simply a corporate agent acting within the scope of his agency,” then “no sole shareholder and officer of a closely-held corporation would ever be liable as a joint employer for wage violations, even if he or she suffered or permitted another to work, controlled wages hours and working conditions, or engaged employees.” [39]

Finally, the Court rejected the trial court’s holding that the FLSA’s “employer” definition is broader than California’s, noting that analysis of joint employer liability under the FLSA and the Labor Code “ordinarily involves the consideration of similar factors.” [40] Indeed, as Martinez made clear, California’s definition of employer is broader than the FLSA’s. [41] The Court observed that the trial court’s ruling that Mr. Parent was a federal joint employer cast serious doubt upon its state joint employer analysis. 

V. California Fair Day’s Pay Act Placed “Other Persons” on the Hook

After extensive negotiations in drafting and intense lobbying by the California Employment Lawyers Association, Wage Justice, and others, on January 1, 2016, the California Fair Day’s Pay Act [42] took effect, which specifies that owners, directors, officers, and managing agents may be liable for violations of overtime and minimum wages (Cal. Lab. Code. §§ 1193.6, 1194), meal and rest breaks (Cal. Lab. Code § 226.7), waiting time penalties (Cal. Lab. Code § 203), itemized wage statements (Cal. Lab. Code § 226), and indemnification (Cal. Lab. Code § 2802) statutes. [43] Labor Code section 558.1, provides that an “employer,” and any “other person acting on behalf of an employer, who violates, or causes to be violated” any of those wage statutes may share liability. [44] “Other person” is defined as “a natural person who is an owner, director, officer, or managing agent.” [45]

Section 558.1 clarified the scope of personal liability for common wage violations occurring after January 1, 2016. [46] It will take time for meaningful case authority on section 558.1 to develop, but thus far, defense counsels’ attempts to dramatically limit its application have failed. [47] Regardless of how section 558.1 jurisprudence develops, employees and advocates may now rely on Turman to hold bad business owners, officers, and directors accountable, applying the three-part Martinez v. Combs test. 




Footnotes

[1] See, e.g., Noam Scheiber, “Labor Board Reverses Ruling That Helped Workers Fight Chains,” NYTimes (Dec. 14, 2017), available at https://nyti.ms/2jTDOIQ; Christine Owens (Op-Ed), “Don’t Let Congress Cheat Workers Out of Basic Rights,” NYTimes (Nov. 8, 2017), available at https://nyti.ms/2hmQDNP.

[2] This article focuses on direct, statutory liability under California wage laws and the Business and Professions Code - not alter ego liability, an equitable doctrine which has always remained an option - albeit, typically an uphill battle for workers to invoke. Generally, alter ego is available to cure an inequitable result - focusing on corporate formalities, overlapping finances, etc. - rather than wages, hours, and working conditions. Turman emphasizes that for alter ego liability to attach, a worker need not show fraud in the inception as to a business entity, but must only show that maintaining the corporate shield would perpetuate an inequitable result. See Turman, 17 Cal.App.5th at 980-981.

[3] See e.g., 29 C.F.R. § 791.2 (regulation defining joint employment under Fair Labor Standards Act (“FLSA”)); Pruitt v. Industrial Acc. Commission of Cal. (1922) 189 Cal. 459, 461 (recognizing joint employer liability in workers’ compensation context).  

[4] A 2013 empirical study by the UCLA Labor Center and the National Employment Law Project examined data from the Labor Commissioner’s wage claim cases between 2008 and 2011 and determined that in 60% of cases where the employer was held liable, the employer was found to be non-active, e.g. having a status of suspended, forfeited, cancelled, or dissolved with the California Franchise Tax Board or the California Secretary of State. Eunice Hyunhye Cho, et al., Nat’l Emp’t Law Project & UCLA Lab. Ctr., Hollow Victories: The Crisis in Collecting Unpaid Wages for California’s Workers (2013) 1, 10-14. The study also found that only 17% of workers who prevailed before the Labor Commissioner ever recovered money from the judgment awarded. Id. at 2, 13-14.

[5] Martinez, 49 Cal.4th at 49 (describing the overtime and minimum wage statute, Labor Code § 1194). There are some wage claims where the “employer” definition is further defined, for example - as to unlawful tip pooling, Labor Code § 350 defines “employer” to include every “person” “irrespective of whether the person is the owner of the business” and a liable employer’s “agent” as one “having the authority to hire or discharge any employee or supervise, direct, or control the acts of employees.”

[6]  Id. at 50, 52; Kilby v. CVS Pharmacy, Inc. (2016) 63 Cal.4th 1, 9 n.3 (“Although the Legislature defunded the IWC in 2014, its wage orders remain in effect.”).

[7] See IWC wage orders Nos. 1-2001 through 16-2001, Cal. Code. Regs., tit. 8, §§ 11010-11160.

[8] Id. at subd. 2(H).

[9] Id. at subd. 2(E).

[10] See Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1338 (discussing scope of UCL protections); County of Solano v. Vallejo Redevelopment Agency (1999) 75 Cal. App.4th 1262 (citing Rest. of Restitution, § 1: “A person who has been unjustly enriched at the expense of another is required to make restitution to the other.”). Turman is the first case to expressly hold that courts have the obligation to assess whether an individual is liable for wage violations under the UCL standard separately from whether he/she is liable under the Labor Code.

[11] Federal courts enforcing PAGA have held individual owners liable for wage violations for  years. McDonald v. Ricardo’s on the Beach, Inc. (C.D. Cal. Jan. 15, 2013) 2013 WL 153860, at *4; Ontiveros v. Zamora (E.D.Cal. Feb. 20, 2009) 2009 WL 425962, at *6. As with the UCL, Turman expressly held that a Court must consider the PAGA standard separately, in determining an individual’s liability for wage violations.

[12] Reynolds, 36 Cal.4th at 1081.

[13] Id. at 1085-1089.

[14] Martinez, 49 Cal.4th at 63 (citing Reynolds, 36 Cal.4th at 1086).

[15] Reynolds, 36 Cal.4th at 1086 (ital. added).

[16] Id. at 1087-1088. The Reynolds concurrence by Justice Carlos Moreno did acknowledge, “The exploitation of such vulnerable workers by unscrupulous individuals hiding behind the corporate form takes place against a backdrop of diminished public resources for the enforcement of the state's labor laws . . . . [PAGA], in time, may provide workers with a mechanism for recovering unpaid overtime wages [from] corporate officers and agents in some cases. (§ 558, subd. (a)).” Id. at 1094.

[17] Id.

[18] See, e.g., Bradstreet v. Wong (2008) 161 Cal.App.4th 1440, 1449-1455 abrogated by Martinez, 49 Cal.4th 3 (shareholders, officers, managing agents not liable under Reynolds); Jones v. Gregory (2006) 137 Cal.App.4th 798, 800, 803-806, 810 abrogated by Martinez, 49 Cal.4th 35 (sole corporate owner not liable under Reynolds); Martinez v. Antique & Salvage Liquidators (N.D. Cal. Feb. 8, 2011) 2011 WL 500029, at *5 (relying on Reynolds).

[19] Martinez, 49 Cal.4th at 62, 66.

[20] Id. at 59 (citing to Cal. Lab. Code §§ 1173, 1178.5; see Stats. 1913, ch. 324, §§ 3, 5 & 6, pp. 633–635).

[21] Id. at 62.

[22] Id. at 64.

[23] Id. at 66.

[24] See, e.g., Garcia v. Bana (N.D. Cal. Feb 19, 2013, No. C 111-02047 LB) 2013 WL 621793, at **1, 8-9, aff’d (9th Cir. 2015) 597 Fed.Appx. 415 (after a bench trial, the court found individual-owner defendant was a joint employer under California and federal wage laws, where he “had the power to hire and fire [plaintiff], supervised and exercised control over [plaintiff]’s wages, hours, and working conditions, determined the method of payment of Mr. Garcia’s wages, and maintained [the business’s] employment records”).

[25] See, e.g., Bain v. Tax Reducers, Inc. (2013) 161 Cal.Rptr.3d 535, 564-567 (depublished Dec. 11, 2013) (holding that Martinez affirmed Reynolds); Guifu Li v A Perfect Day (N.D. Cal. 2012) 281 F.R.D. 373, 402 n.28 (Martinez notwithstanding, Reynolds “forecloses Plaintiffs’ ability to hold a corporation’s directors, officers, and shareholders personally liable for the corporation’s state law wage and hour violations”).

[26] Turman, 17 Cal.App.5th at 972, 974.

[27] Id. at 974-975.

[28] Id. at 974.

[29] Parent made the stipulation in a related proceeding. The original named plaintiff, Amanda Quiles, obtained a jury verdict that Parent retaliated against her in violation of the federal FLSA for filing the wage and hour class action, saying “get rid of her” after learning of her lawsuit. Though her wage loss was only $3,000 and her emotional distress was just $27,500, the jury awarded $350,000 in punitive damages, based upon Parent’s stipulated $10 million net worth.

[30] See Turman, 17 Cal.App.5th at 974-978.

[31] Id. at 978, 987; Statement of Decision on Trial of Issues of Alter Ego and Joint Employer, Quiles (Apr. 2, 2015) Case No. 30-2010-00425532, at p. 10:22-23.

[32] Id. at 978, 983-984.

[33] Id. at 983-984.

[34] Id. at 986.

[35] Id.

[36] Id. at 985.

[37] Id. at 986.

[38] Id.

[39] Id.at 986-987.

[40] Id. at 987 (citing Martinez, 49 Cal.4th at 59-60).

[41] See Guerrero, 213 Cal.App.4th at 945; Torres v. Air to Ground Servs., Inc. (C.D. Cal. 2014) 300 F.R.D. 386, 394 (citing Martinez for the proposition that “the IWC’s definition of ‘employer’ is designed to afford greater protection to employees than the FLSA’s definition of that term”); Carrillo v. Schneider Logistics Trans-Loading & Distribution, Inc. (C.D. Cal. Jan. 14, 2014) 2014 WL 183956, at *15 n. 5 (California joint employer standard broader than FLSA’s). See also generally Mendiola v. CPS Sec. Solutions, Inc. (2015) 60 Cal. 4th 833, 843 (“Federal regulations provide a level of employee protection that a state may not derogate. Nevertheless, California is free to offer greater protection.”).

[42] Stats. 2015, Ch. 803, Sec. 10. (SB 588), codified as Cal. Lab. Code § 558.1.

[43] Cal. Lab. Code § 558.1 subd. (a).

[44] Id.

[45] Cal. Lab. Code § 558.1 subd. (b).

[46] Cal. Lab. Code § 558.1 subd. (c) (“Nothing in this section shall be not construed to limit the definition of employer under existing law.”).

[47] See, e.g., Carter v. Rasier-CA, LLC (N.D. Cal., Sept. 15, 2017) 2017 WL 4098858, at *5 n.1 (“Defendants’ attempt to limit California’s ‘A Fair Day’s Pay Act’ to enforcement actions by the Labor Commissioner is belied by the language of the provision itself”).