California Supreme Court Clarifies Who Can Be Liable For Alleged Wage And Hour Violations

Today, by a unanimous decision in Martinez v. Corky N. Combs, the California Supreme Court clarified the standard courts must use to determine who is liable as an "employer" for violations of wage and hour laws embodied in Industrial Welfare Commission ("IWC") Wage Orders, including claims for unpaid or underpaid wages.We think the decision is generally favorable for employers because the Supreme Court expressly rejected on the facts before it a number of theories of liability plaintiffs sometimes assert when attempting to hold liable for wage and hour claims persons or entities other than the obvious "employer."

Miguel Martinez and others were employed by Isidro Munoz, Sr., who did business as Munoz & Sons ("Munoz"), as seasonal agricultural workers who picked and sometimes packed strawberries. After Munoz failed to pay the employees' wages for a period of weeks, the employees submitted claims to the Division of Labor Standards Enforcement and later filed suit against Munoz and against two businesses that regularly purchased strawberries from Munoz and against certain employees of those businesses. The employees alleged the defendants were all liable for unpaid minimum wages (Labor Code section 1194), for liquidated damages for unpaid minimum wages (section 1194.2), for unpaid contract wages (section 216) for waiting time penalties (section 203), for breach of contract, and derivative claims under California's Unfair Competition Law (Business and Professions Code section 17200, et seq.).

The trial court and the Court of Appeal determined that neither the other businesses that did business with Munoz nor the employees of those businesses were liable to the employees for their claims. The employees then petitioned the California Supreme Court to review the Court of Appeal's decision affirming the trial court's decision.

In a lengthy 56-page opinion, the Supreme Court revisited its decision in Reynolds v. Bement (2005) 36 Cal.4th 1075 holding that a corporation's officers and directors are not personally liable for unpaid overtime compensation and concluded that it "spoke too broadly in concluding that the common law defines the employment relationship in actions under [Labor Code] section 1194. The Supreme Court now states "an examination of section 1194 in its full historical and statutory context shows unmistakably that the Legislature intended to defer to the IWC's definition of the employment relationship in actions under [section 1194]." The Supreme Court explained, nevertheless, that its holding that a corporation's officers and directors are not personally liable for wage and hour violations when acting within the scope of their employment remains in tact because that opinion "properly holds that the IWC's definition of 'employer' does not impose liability on individual corporate agents acting within the scope of their agency."

The Supreme Court went on to hold that the IWC's definition of "employer" does not incorporate federal law. Similarly, and potentially significantly, the Supreme Court noted also that the IWC's broader definition of the term "hours worked" was in response to enactment of the Federal Portal-to-Portal Act, "which relieved employers of the obligation to compensate employees for time spent traveling to the work site, even in an employer's vehicle, and for time spent in activities 'preliminary and postliminary' to work," and intended by the IWC to provide California employees with greater protection than Federal law provides.

Turning to the IWC' s definition of the employment relationship in the wage orders, the Supreme Court now states that under the IWC's definition, to "employ" means "(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage [a person to work], thereby creating a common law employment relationship. "

Applying the above test to the facts of the case in the record before it, the Supreme Court further held:

1. Neither of the businesses that did business with Munoz had a business relationship with Munoz that allowed those businesses to "exercise control over Munoz's employees' wages and hours."

2. Neither of the businesses that did business with Munoz "suffered or permitted plaintiffs to work because neither had the power to prevent the plaintiffs employees from working." Rather, Munoz and his foreman had exclusive power to do that.

3. Neither of the businesses that did business with Munoz had a business relationship with Munoz that allowed either of them to directly or indirectly "exercise control over Munoz's employees' wages and hours." Rather, "Munoz alone, with the assistance of his foremen, hired and fired plaintiffs, trained and supervised them, determined their rate and manner of pay . . ., and set their hours, telling them when and where to report to work and when to take breaks."

4. Neither of the businesses that did business with Munoz nor the employees of one of those businesses who encouraged Munoz' employees to continue working to help Munoz and who told Munoz' employees that they would be paid once Munoz received additional payments from one of the business did not "engage to work" the employees of Munoz because the facts and circumstances made it clear that no offer of employment was being made.

5. Although employees of the businesses that did business with Munoz frequently spoke in the filed with Munoz' employees about how the strawberries were to be packed, they nevertheless did not exercise sufficient control over how services are performed and hence the working conditions of Munoz' employees because no evidence in the record showed that any of Munoz' employees thought they must obey anyone other than Munoz or Munoz' foremen.

6. The Supreme Court rejected also the plaintiffs' contention that they were entitled to recover their unpaid wages as third party beneficiaries of a contract between Munoz and one of the businesses that did business with Munoz. Because the contract at issue required Munoz to comply with all applicable laws, including "labor," the plaintiff employees argued that the business was liable to them for their claims. The Supreme Court rejected that argument, stating, "[t]he plain import of these contractual provisions is that Munoz agreed to pay his employees the wages required by law, assuming sole responsibility in the matter. . . ."

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