Getting the Bad Guys to Pay

How the California Supreme Court’s Martinez v. Combs Decision Might Affect Which “Employers” Can Be Liable Under the State’s Overtime Laws

Crafty employers have long sought clever ways of avoiding the broad protections the California Labor Code provides to workers with regard to minimum wage and overtime payment requirements. California, which has some of the nation’s most protective employee rights laws, has enacted minimum wage and overtime requirements through its system of Wage Orders issued through the Industrial Welfare Commission (IWC).

The minimum wage and overtime protections afforded to employees have long been limited to traditional “employer/employee” relationships. However, California’s law and courts have sometimes provided employees and their lawyers with muddied guidance as to the meaning of the critical term “employer.” Because of this, employers and individual managers have been able to avoid legal liability for violating minimum wage and overtime laws by setting up elaborate employment systems with third party contractors and other intermediaries acting as straw men and protecting the true employer. For example, garment workers have long worked for nearly insolvent subcontractors who are, for all intents and purposes, controlled by large corporations. The corporations dictate the terms of employment, the subcontractors pay the workers, and should the subcontractors violate wage and hour laws, they would incur liability leaving the large, solvent corporations off-the-hook. Such examples permeate many employment sectors in California, but particularly those with the lowest paid and most vulnerable workers. However, the California Supreme Court has recently taken steps to provide lawyers with guidance as to who may be considered an employer in the context of California wage and hour laws.

The court in Martinez v. Combs, 2010 WL 2000511 (Cal. S.Ct. May 20, 2010), faced the question of how to define which persons may be held liable as employers under California Labor Code Section 1194 (relating to payment of minimum wage and overtime compensation). Plaintiffs in Martinez were seasonal agricultural workers who sued their employer, two produce merchants with whom their employer contracted, and a field representative for one of the produce merchants, seeking to recover unpaid minimum wages. Though the Court found ultimately that the two produce merchants and the field representative were not the Plaintiffs’ employers, the Court broke new ground elaborating the definition of “employer” for the purposes of California wage and hour law. As the Court noted, this is an issue which has only been examined once since the Legislature created the IWC in 1913.

Here is what the Court held, and what it may mean to an employee:

The IWC Reigns Supreme

In a bow to the California Legislature’s intent, the Court held that “an examination of section 1194 in its full historical and statutory context shows unmistakably that the Legislature intended to defer to the IWC’s definitions of the employment relationship in actions under the statute.” Martinez at *16. The court thus acknowledged the IWC’s definition of “employer,” found within its various Wage Orders, to be dispositive in any dispute as to the presence of an employer/employee relationship.

The IWC defines an 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.

The court further noted that within the context of this definition, the term “employ” carries significant legal meaning. As such, the court adopted the IWC’s definition of “employ” as: To engage, suffer, or permit to work.

By adopting these definitions, the court arguably broadened the scope of who can be deemed an “employer” under California wage and hour laws that had been defined by prior Supreme Court decisions, Reynolds v. Bement 36 Cal.4th 1075, Bradstreet v. Wong 161 Cal App.4th 1440 (holding that the common law definition of “employer” was controlling in California wage and hour cases thereby finding that individual corporate officers could not be held liable as employers), thereby arguably providing legal recourse to individuals in non-traditional employer/employee relationships.

In analyzing the significance of adopting the IWC’s definition of “employer” for the purposes of Labor Code Section 1194 lawsuits, the court noted that the “language consistently used by the IWC to define the employment relationship…was commonly understood to reach irregular working arrangements that fell outside the scope of the common law.” Martinez 2010 WL 2000511 at *17. Given this analysis, the court stepped away from prior holdings in Reynolds v. Bement and Bradstreet v. Wong by finding that the common law definition of “employer” was not controlling in Section 1194 cases. Instead, the court held that “the IWC’s definition of employment incorporates the common law definition as one alternative.” Martinez at *16.

To make sense of the potentially broadening effect of the Court’s analysis in Martinez v. Combs, let us examine the different scenarios where a party can be found to be an employer.

When an agent or person engages a person to work:

The definition of “engage” is rooted in the common law’s treatment of an employment relationship. The common law’s definition of an employment relationship was premised on a traditional master/servant relationship. However, the Court gave limited treatment of this term, only noting that “'to engage’ has no other apparent meaning in the present context than its plain, ordinary sense of ‘to employ,’ that is to create a common law employment relationship.” Martinez at *16.

When an agent or person suffers or permits a person to work:

A person suffers or permits an employee to work when he or she has the right to hire and fire the workers, the right to set the wages and hours of the workers, and tell the workers when and where to report to work. However, if a person does not have the power to stop an employee from working, he or she cannot suffer or permit a person to work. As the Court indicated, the basis of liability under the “suffer or permit to work” standard is “the defendant’s knowledge of and failure to prevent the work from occurring.” Martinez at *20. Consider a situation where you were hired and receive your paychecks from company X, but you work in a factory owned by company Y, are told when to work and how to complete your work by supervisors of company Y, and can be fired by the supervisors of company Y. Under the holding in Martinez, both company X and Y could be your employers and you would be entitled to sue both or either for any violations of California minimum wage and overtime laws.

When an agent or person has control over the wages, hours, or working conditions of a person:

This condition is related to that previously described under the “suffer or permit” standard. An individual or entity may be deemed your employer for the purposes of California wage and hour law if that individual or entity: controls the wages you earn, including but not limited to setting your wage rate and paying your checks; controls the hours you work; or controls your working conditions. Your working conditions are situations such as where you work and how you are to perform work. When an individual or entity controls any of these aspects of your work, he/she/it may be considered your employer.

Remnants of Reynolds

Though the court seemingly moved away from its prior decision in Reynolds by finding that the IWC’s definition of “employer,” as opposed to the common law’s definition, is controlling in Section 1194 wage and hour cases, the Supreme Court notably upheld the holding in Reynolds that “the IWC’s definition of ‘employer’ does not impose liability on individual corporate agents acting within the scope of their agency.” Martinez at *18. However, one can arguably read this holding to mean that the Supreme Court is attempting to limit the holding of Reynolds to its facts. In Reynolds, the Plaintiff, a “shop manager” for a chain automobile painting business, sued his corporation and individual shareholders and corporate officers for violations of Labor Code Section 1194. The court held that common law clearly establishes that “corporate agents acting within the scope of their agency are not personally liable for the corporate employer’s failure to pay its employee’s wages.” Reynolds 36 Cal.4th at 1087.

The Martinez court’s decision to uphold this vestige of Reynolds created an inconsistency left to be resolved by the Court in future decisions or by the Legislature through a clear statement of its intent. However, until that is done, we are left with mixed messages: the Court, through its adoption of the IWC’s definition of “employer,” held that an employer can be “any person,” yet on the other hand the Court, through its refusal to fully overturn Reynolds, held that the IWC’s definition of employer does not impose liability on individuals in their capacity as corporate agents.

What It All Means

The court explicitly opens the door to create liability in instances where multiple employers control various factors of an employee’s work. So for instance, if one company signs your paychecks and tells you where to work but another company determines your wages, retains the right to hire and fire you, and controls how you are to complete your work, the second company may now be considered an employer and be held liable for any violations of California wage and hour laws.

However, because the Court declined to completely overturn Reynolds, there is some uncertainty as to how future courts will decide cases where individuals, as well as corporate bodies, are defendants under wage and hour claims in California. Because the Court in Martinez was clear to hold that the critical elements necessary to find an employment relationship are the ability to supervise, hire and fire, set the wages, and control the working hours and conditions of the employee, plaintiffs’ attorneys have an opportunity to plead that such individuals who control these aspects of an employment relationship are indeed employers and hence liable.

Because employers often find ways to evade liability through new and creative employment structures, it is up to brave employees to challenge practices they deem unfair. Warning signs may include situations such as being hired and paid by one company but being directed at your worksite by agents of another company. By challenging such practices, employees can help further define this area of the law in light of Martinez v. Combs.

If you question why you are not receiving compensation to which you believe you are entitled, and you want advice from an attorney, please contact Bryan Schwartz.