Important New Joint Employer Decision: Corporate Parents Responsible for Employment Violations by Wholly-Owned, Controlled Subsidiaries

Can a parent company avoid liability for unlawful employment policies at its wholly-owned subsidiaries? This week, a California Court of Appeal issued an important decision on that question, holding that a corporate parent could be found liable for its subsidiary’s failure to pay overtime and minimum wages. The opinion, Castaneda v. Ensign Group, Inc., B249119 (Cal. App. 2d Dist. Sept. 15, 2014), is available here.

The case was filed on behalf of a class of certified nursing assistants asserting wage claims. They brought suit against The Ensign Company (“Ensign”), which is a parent company that owns a “cluster” or “portfolio” of companies providing nursing care, including the entity at which the named Plaintiff worked, Cabrillo Rehabilitation and Care Center (“Cabrillo”). Ensign argued that because Cabrillo was registered as an independent entity, and because it allegedly hired and paid Plaintiff and set his schedule, only Cabrillo could be held liable for wage violations as Plaintiff’s “employer.” The lower court agreed, and granted a motion for summary judgment dismissing Ensign from the case. 

The Court of Appeal reversed, ruling that a jury could conclude that Ensign was Plaintiff’s “joint employer” under California law. Building on the Supreme Court’s Martinez v. Combs case, as well as recent Court of Appeal decision Guerrero v. Superior Court (both of which we have blogged about, here, here, and here), the 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 Guerrero). Quoting Martinez, the Court 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” (italics added by Castaneda Court). The Court found plenty of evidence that Ensign “controlled” its various affiliates, including Cabrillo, and that Ensign had the power to ensure that its subsidiaries complied with the wage laws.

For example: Ensign was the sole shareholder of Cabrillo, as well as other Ensign subsidiaries that performed corporate functions for Cabrillo; Ensign was involved in recruiting Cabrillo employees; Cabrillo’s management reported up to individuals at other wholly-owned Ensign affiliates; Ensign uses a “services center approach,” in which it performs centralized IT, human resources, legal, risk management, and other key services to its affiliates; there was a flow of corporate officers between Ensign and its affiliates; Ensign required Cabrillo employees to use its forms and templates; Ensign implemented expectations that Cabrillo employees increase revenues, and offered cash bonuses to Cabrillo if it maximized profits; and Ensign controlled the manner in which employees tracked their time (i.e., circumstances closely related to the policy the Plaintiffs sought to challenge as unlawful).

Although Ensign had attempted to create a paper trail stating that “the members of the facility staff [at Cabrillo] are Cabrillo’s ‘own’ employees,” the Court noted that such labels will be ignored when “the evidence of [the entities'] actual conduct establishes that a different relationship exists.” The Court also took into account the fact that Ensign’s logo  was posted at Cabrillo, employees at Cabrillo viewed themselves as Ensign employees and had Ensign email addresses, and Ensign controlled their pension plan and provided an “Ensign Benefits Call Center” for them to contact with questions.

The Court’s decision is the right one:  The facts suggested that the parent had the ability to correct the allegedly unlawful policy in effect at its wholly-owned subsidiary. Dismissing parents simply because they have separately incorporated their facilities would allow them to avoid enforcement of the wage laws by pinning the blame on their individually incorporated affiliates, even when the parent is responsible for the policy or practice being challenged.