Corporate
owners, officers, and directors – better make sure your company is following
California’s wage laws, or you could be liable…personally. California workers and those who advocate on their
behalf just gained a critical tool in the ongoing fight against wage theft
across the state.
Bryan Schwartz
Law has been litigating for more than seven years on behalf of low-wage workers
at two now-shuttered Southern California restaurants, who brought a class
action lawsuit alleging widespread wage theft against the closely-held
corporation that owned the restaurants. After that corporation declared
bankruptcy and closed the restaurants, the litigation principally focused on
whether the plaintiff workers could recover their unpaid wages from that
corporation’s sole owner, officer, and director as their joint employer, or
alternatively, whether they could recover from that owner or his other business
entity as the restaurant corporation’s alter egos. As a result of the Court’s published
opinion in Turman v. Superior Court, the class of workers can now proceed to prosecute their wage claims
against the owner and his other business, rather than the pyrrhic victory of a
worthless judgment against an insolvent entity.
The Court
ordered publication of two sections of the opinion, which address individual
owners’ liability for unpaid wages under alter ego and joint employer theories.
As to alter ego, the Court ruled that under the standard set by Sonora Diamond Corp. v. Superior Court
(2000) 83 Cal.App.4th 523, an employee need not prove that the alleged
alter-ego corporation was formed for the
purpose of committing fraud or other misdeeds, as the trial court had
erroneously determined. This section thus provides critical guidance to courts
considering whether an entity formed for a lawful purpose may nonetheless be
held liable as an alter ego if the corporate form is later used for an unlawful
purpose.
As to joint
employer, the Court interpreted the Supreme Court’s decision in Martinez v. Combs (2010) 49 Cal.4th 35,
which held that, in actions for unpaid wages under the California Labor Code,
courts must look to the three-part definition of “employer” within the
Industrial Welfare Commission Wage Orders. Like a corporation, an individual
can be liable if: he or she controls the wages, hours, and working conditions
of the employees denied proper wages; suffers or permits workers to labor
without proper pay; or meets the common-law test for an employer. The trial
court had mistakenly ruled that Martinez was
applicable only to efforts to hold other corporate entities liable, as opposed
to individual owners, officers, or directors.
The Court of
Appeal explained that “[The Owner’s] status as a sole shareholder and president
of Koji’s cannot insulate him, or any other sole owner of a closely held
corporation, from liability as a joint employer if his actions meet any one of
the three definitions set forth in Martinez.”
Turman thus makes clear that Martinez’s broad definition of employer
applies uniformly in actions for unpaid wages.
Importantly, the
Court also held that the tip pooling statute (Labor Code § 351), the Unfair
Competition Law (Business & Professions Code § 17200 et seq.), and the Labor Code Private Attorneys General Act each
have different standards for liability, separate from the Wage Order and common
law definitions, which no published opinion had previously addressed. The
opinion thus offers clear guidance to trial courts that they must consider each
of these different standards, if applicable, and that they cannot simply ignore
them.
Turman may have a broad impact, because
so many workers obtain a judgment for unpaid wages against a defunct entity and
are unable to collect. A 2013 empirical study by the UCLA Labor Center and the
National Employment Law Project examined data from California Labor
Commissioner wage claim cases and determined that in 60% of cases, the
employing business was found to be non-active (having a status of cancelled,
forfeited, dissolved, or suspended). The study also found that 83% of workers
who prevailed before the Labor Commissioner never recovered a penny of the
judgment awarded.
For their
support in obtaining this long-anticipated victory, Bryan Schwartz Law thanks co-counsel
Altshuler Berzon, as well as amici curiae
the California Employment Lawyers Association, Legal Aid at Work, Asian Americans
Advancing Justice—Asian Law Caucus, Centro Legal de la Raza, Los Angeles
Alliance for a New Economy, National Employment Law Project, Wage Justice
Center, the Women’s Employment Rights Clinic of Golden Gate University School
of Law, and the UCLA Labor Center.
