California appellate ruling reinforces that business owners may be personally liable for their corporation’s violations of state wage laws
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 (see 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 them4 – 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 have 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.
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 Lab. Code, § 18: “‘Person’ means any person, association, organization, partnership, business trust, limited liability company, or corporation.”).)11
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.11 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.12 The Court observed that while the relevant IWC order’s definition of employer controlled,13 the IWC order did “not expressly impose liability under section 1194 on individual corporate agents.”14 The Court reasoned that absent a clear statutory directive, a common law definition of employer should apply.15 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.”16
Following Reynolds, many state and federal courts applying California law precluded wage relief against owners, officers and directors as a matter of course.17
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.18 The Court explained the legislature had delegated authority to the IWC over wages, hours, and working conditions.19 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.”20
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: “ to exercise control over the wages, hours or working conditions, or  to suffer or permit to work, or  to engage, thereby creating a common law employment relationship.”21
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.”22
Despite Martinez setting a new course on the definition of “employer” in California wage law, with rare exceptions,23 courts remained reluctant to find liability against an individual, harkening back to Reynolds24 – until now.
Turman clarifies Martinez’s application to individual defendants
The Turman decision finally provides clarity regarding who may be personally liable as an employer.
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.25 Plaintiffs brought a class action lawsuit alleging wage theft against the closely held corporation that owned the restaurants.26 The restaurant’s sole shareholder, president, and director, Mr. Parent, closed the restaurants after the case was filed.27 Though the restaurant-corporation’s bank accounts were drained of funds, Mr. Parent stipulated to a net-worth of over $10 million.28 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.29
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,”30 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.31 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.32
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.33
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 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.34 The Court was careful to note that the IWC’s three-part test “incorporates the common law definition as one [of the three] alternative” definitions.35
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.”).)36
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.37
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, 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.”38
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.”39 Indeed, as Martinez made clear, California’s definition of employer is broader than the FLSA’s.40 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.
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 Act41 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.42
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.43 “Other person” is defined as “a natural person who is an owner, director, officer, or managing agent.”44
Section 558.1 clarified the scope of personal liability for common wage violations occurring after January 1, 2016.45 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.46 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.
A smart and tenacious litigator, Bryan Schwartz has represented clients’ interests before a wide range of adjudicative bodies: from the United States District Court, to United States Courts of Appeals; from California Superior Courts to the California Supreme Court; from the Equal Employment Opportunity Commission, to the Merit Systems Protection Board; from the United States Department of Labor, to labor arbitration before the American Arbitration Association and other organizations. Mr. Schwartz has helped many grateful clients get their careers back on track after employer wrongdoing derailed them, obtaining tens of millions in recovery for employees across the country.
Mr. Schwartz’s efforts on behalf of whistleblowers and discrimination victims have been publicized worldwide, from The Washington Post to the Wall Street Journal, from National Public Radio to MSNBC, from Voice of America to India’s Hindustani Times. Mr. Schwartz has developed a niche in Federal employees’ unique claims, and has led multi-plaintiff class and collective actions involving overtime and other wage violations under state and federal laws across the country.
Before founding his own firm in 2009, Mr. Schwartz led the San Francisco, California, office of Nichols Kaster, LLP. Previously, Mr. Schwartz practiced with the Washington, DC-based firm of Passman & Kaplan, PC, and clerked for the Hon. Franklin Van Antwerpen, currently a senior member of the Third Circuit Court of Appeals.
Mr. Schwartz is the Chair of the State Bar of California’s Labor and Employment Law Section, which has over 7500 members. He is immediate past President of FAIR, a non- profit foundation dedicated to increasing diversity in the plaintiffs’ employment Bar and to workers’ rights education, and a member of the Executive Board of the California Employment Lawyers Association (CELA) and the Board of Directors of the Legal Aid at Work (formerly Legal Aid Society – Employment Law Center).
Mr. Schwartz has chaired the Annual Meeting of the Labor and Employment Law Section, and the State Bar’s Advanced Wage and Hour Conference. He helped to initiate CELA’s statewide Employee Justice Fellowship, to aid law students of all backgrounds in entering the practice of representing workers, and CELA’s annual Diversity Summit, by which hundreds of labor and employment lawyers gather to discuss how to create leadership opportunities for diverse attorneys in the field and overcome bias in the profession. Mr. Schwartz appeared as amicus curiae before the California Supreme Court on behalf of CELA in several critical cases, including Brinker Restaurant Corp. v. Superior Court, Kirby v. Immoos Fire Protection, and Duran v. US Bank.
Mr. Schwartz is one of California’s most prolific speakers and authors on employment law subjects. He has presented often to the State Bar, the National Employment Lawyers Association, CELA, and elsewhere, from NPR’s “Your Legal Rights” radio show, to the ABA’s Commission on Disability Rights, to the San Francisco Trial Lawyers Association, to JAMS (the arbitration and mediation provider). His articles have been published in the California Labor and Employment Law Review, Plaintiff Magazine, and other media. The firm’s blog is a resource to jurists, attorneys, and workers nationwide.
As a young man, Mr. Schwartz was elected the International Programming Vice President of the B’nai B’rith Youth Organization and President of Cornell University’s student government. After graduating from Cornell and before law school at the University of California at Berkeley, Mr. Schwartz was a Federal Investigator (bilingual-Spanish) at the U.S. Equal Employment Opportunity Commission, a campaign manager, and a school teacher in Costa Rica. Also a professional photo journalist, Mr. Schwartz has traveled to nearly 50 countries on fi e continents, is the author of Scattered Among the Nations and is President of the non-profit organization, Scattered Among the Nations. Mr. Schwartz is past President of Temple Beth Abraham in Oakland, California.
Rachel Terp is the Senior Associate at Bryan Schwartz Law. She second-chaired the trial of the Turman case, resulting in the important precedent discussed in this article.
2018 by the author.
For reprint permission, contact the publisher: www.plaintiffmagazine.com