Wednesday, September 17, 2014

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.

Friday, September 12, 2014

Federal Courts: Cosmetology Student-Workers May Pursue Unpaid Wages

Aspiring barbers and cosmetologists enroll in beauty schools for a chance at a promising career in cosmetology. Cosmetology students pay upwards of $15,000 tuition to enroll in beauty schools such as Milan Institute of Cosmetology, Marinello Schools of Beauty, and Paul Mitchell The School and, upon completion, hopefully obtain a cosmetology license.

To graduate from these beauty schools, while enrolled, students are required to work in beauty school salons serving paying customers. The students perform services requested by customers whether or not it furthers the training needed to become licensed cosmetologists. Students are also assigned duties that do not assist them in obtaining a cosmetology license, such as janitorial and laundry services, as well as selling beauty products on behalf of the beauty schools. Students receive no compensation, no overtime pay, no premium pay for missed meal and rest breaks, and are not reimbursed for supplies and equipment purchased for use on the beauty school salon customers. Through this scheme, the beauty schools profit from free labor in their salons.

In the cases pending against them, the beauty schools filed motions to dismiss California and Nevada wage law claims, arguing that under Hutchison v. Clark, 67 Cal.App.2d 155 (1944), publications of the California Division of Labor Standards Enforcement (DLSE), and provisions of the Nevada state cosmetology laws and regulations, cosmetology school students cannot be employees of the schools. The student-workers argue that they are employees pursuant to state and federal labor laws, and that developments in the law render obsolete the 70 year-old Hutchison decision and the DLSE guidance relying upon it. In Martinez v. Combs (2010) 49 Cal.4th 35, the California Supreme Court established a more modern “employer” definition that does not categorically exclude student-workers from compensation.

On July 30, the United States District Court for the Central District of California, Hon. Phillip S. Gutierrez, determined that cosmetology students performing work on paying customers in cosmetology school salons may be deemed employees in the context of state law. They may be entitled to minimum wages, overtime, and other benefits of the Labor Code. The decision is available here. Judge Gutierrez held that “[a]fter Martinez, Hutchison is no longer good law.” Applying the Ninth Circuit Court of Appeals’ standard for evaluating claims under state law where the California Supreme Court has not yet addressed the issue, the court held:
Based on Martinez, the Court concludes that the California Supreme Court would hold that [Defendants’] students may be properly classified as its employees, if they are within the definition of “employment” established by the IWC. 

The court further concluded that the California Barbering and Cosmetology Act is silent regarding whether cosmetology students must be paid for work they perform within their beauty school. The cosmetology students may be covered by California’s wage and hour laws and Wage Order No. 2, holding that “the employment status of cosmetology students is left to be determined by California employment law.” The court also gave the student-workers a fix to amend their complaint to add more allegations against the individual owner of the cosmetology school. The federal court in San Francisco followed suit, refusing to dismiss California and Nevada wage law claims, and allowing an opportunity to amend to add claims against the individual owners. The San Francisco court also asked the Labor Commissioner of California to weigh in on whether cosmetology students can also be school employees.

After these victories, there is no categorical exemption from pay for beauty school students in vocational programs who perform services on paying customers. The law requires an analysis of whether an employment relationship exists and, if proven, vocational schools must abide by wage and hour laws. The analysis is similar to that for wage claims by other interns, apprentices, and trainees in the economy. The most important factor is whether the students’ salon work provides an immediate benefit to the schools (which it does), and some other factors to consider are whether the training provided is largely not for the benefit of students, whether the students’ salon work is closely supervised, and whether regular employees are displaced by the use of the students’ labor.

Bryan Schwartz Law and co-counsel Rudy, Exelrod, Zieff & Lowe LLP and the Law Office of Leon Greenberg represent Plaintiffs and putative classes of current and former cosmetology students at Milan and Marinello. Bryan Schwartz Law along with the Law Office of Leon Greenberg represent Plaintiffs and putative classes of current and former Paul Mitchell cosmetology students. The complaint against Milan, Maria Ford v. Gary Yasuda, et al., Case No. 13-1961, pending in federal court in the Central District of California (in Los Angeles), is available here. The complaint against Marinello, Jaqueline Benjamin v. B&H Education, Inc. et al., Case No. 13-cv-04993, pending in federal court in the Northern District of California (in San Francisco), is available here. The complaint against Paul Mitchell, Jessica Morales et al v. Von Curtis, Inc. et al., Case No. 14-06540, pending in federal court in the Central District of California (in Los Angeles), is available here

For more information about these cases, please contact Adetunji Olude at