Joint employer liability can arise in many different contexts, such as when using staffing agencies, management companies, or in even in the franchise context.  Companies must understand the factors a court could apply in determining if a potential joint employer relationship exists between the two entities to avoid being potentially liable for employment lawsuits filed because of the actions of another employer.

The California Supreme Court set out the factors that can create a joint employer relationship in Martinez v. Combs.  Under this test, to “employ” means (1) “to exercise control over… wages, hours or working conditions,” (2) “to suffer or permit to work,” or (3) “to engage, thereby creating a common law employment relationship.”  The court in Ochoa v. McDonald’s Corp. explained that “[a]ny of the three is sufficient to create an employment relationship.”  In addition to the factors that California courts apply, employers must understand the federal framework that could also apply to employees by the Department of Labor in enforcing the FLSA and other federal laws.  This Friday’s Five discusses five issues that could create joint employer liability under California and Federal law.

1. An entity can be held a joint employer if it exercises control over wages, hours, or working conditions.

Under California law, an entity can be held liable under the joint employer theory if it “directly or indirectly, or through an agent or any other person, employs or exercises control” over their wages, hours, or working conditions.  While this standard is potentially broad in scope, courts have limited its reach in holding that entities that may be able to influence treatment of employees but that do not have any actual “authority to directly control their wages, hours or conditions” are not joint employers.  Ochoa v. McDonald’s Corp.  The court in Ochoa explained that the California Court of Appeal in Futrell v. Payday California, Inc. held that “control over wages means that a person or entity has the power or authority to negotiate and set an employee’s rate of pay, and that an entity that does not control the hiring, firing, and day-to-day supervision of workers is not an employer.”

2. An entity can be liable for “suffering or permitting” the work.

The California Supreme Court held in Martinez v. Combs that the “basis of liability is the defendant’s knowledge of and failure to prevent the work from occurring.”  The analysis is whether the entity had power to cause the employee to work or the power to prevent the employee from working.

3. Joint employer liability exists if the employee is “engaged.”

The Court in Martinez held that “to engage” means to create a common law employment relationship.  In terms of the franchisor and franchisee context, the California Supreme Court explained the test is whether the alleged employer “has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.”  Patterson v. Domino’s Pizza.

4. “Ostensible” agency.

Ostensible agency holds a principal liable for acts of the “ostensible agent.”  This liability is created when: (1) the person dealing with the agent must do so with belief in the agent’s authority and this belief must be a reasonable one; (2) such belief must be generated by some act or neglect of the principal sought to be charged; and (3) the third person in relying on the agent’s apparent authority must not be guilty of negligence.  Put another way, “A principal is bound by acts of his agent, under a merely ostensible authority, to those persons only who have in good faith, and without want of ordinary care, incurred a liability or parted with value, upon the faith thereof.”  Cal. Civil Code section 2334.

5. Department of Labor’s Administrative Interpretation issued in 2016.

In January 2016, the DOL issued an Administrative Interpretation regarding how the agency views joint employment liability.  The DOL explains that under the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), “an employee can have two or more employers for the work that he or she is performing. When two or more employers jointly employ an employee, the employee’s hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime pay is due. Additionally, when joint employment exists, all of the joint employers are jointly and severally liable for compliance with the FLSA and MSPA.”  While not necessarily binding on courts, the DOL’s interpretation is instructive of how broadly it views the joint employer test.

2016 will be a year in which joint employer liability will be a major issue for employers.  Why am I making this prediction?  First, the NLRB has refocused attention to this issue in hopes of expanding the number of employers that can be found jointly liable.  Second, the Department of Labor issued an Administrative Interpretation this week and set up a new website setting out how the DOL views the joint employer analysis.  Today’s Friday’s Five focuses on five issues employers should review regarding the joint employer analysis.

1.      Employers should review the DOL’s Administrative Interpretation on the joint employer relationship

On January 20, 2016, the Department of Labor issued an Administrative Interpretation regarding how it views and would analyze whether there is joint employer liability between two or more different entities that share workers.  The Administrative Interpretation can be read here.

The DOL sets out the difference between horizontal joint-employers and vertical-joint employers:

 Horizontal joint employment exists where the employee has employment relationships with two or more employers and the employers are sufficiently associated or related with respect to the employee such that they jointly employ the employee. The analysis focuses on the relationship of the employers to each other.

Vertical joint employment exists where the employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider, or other intermediary employer) and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work. This other employer, who typically contracts with the intermediary employer to receive the benefit of the employee’s labor, would be the potential joint employer. Where there is potential vertical joint employment, the analysis focuses on the economic realities of the working relationship between the employee and the potential joint employer.

The DOL’s opinion letter sets out the factors it would review in making a determination under the horizontal or vertical joint employment scenarios, and employers should review these factors.  The DOL also created a website setting out additional information about joint employment under the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act.

2.      California’s joint employer test

“[T]he basis of liability is the defendant’s knowledge of an failure to prevent the work form occurring.”  Martinez v. Combs, 49 Cal.App.4th 35, 70.  Therefore, to be an employer, the entity must have power to prevent the worker from performing work.  If there is no control to prevent the work, the entity cannot be held liable as a joint employer.

California’s Industrial Welfare Commission (IWC) also sets forth law regarding California’s wage and hour requirements.  The IWC definition also includes “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.”  The court in Martinez held that a joint employer relationship exists when one entity, which hires and pays workers, places the worker with another entity that supervises the work.  There are many factors that a court can look to in making this determination, and employers should approach

3.      Additional responsibilities for California employers under Labor Code section 2810.3

Effective January 1, 2015, Labor Code section 2810.3 expanded the liability of “client employers” that obtain workers through temporary agencies or other labor contractors.  The law requires that the client employer who obtains the workers through the agency must share in the liability for any wage and workers compensation issues.  The law also provides that a client employer cannot shift all of the liability for wage and workers compensation violations.  However, the law does provide that the client employer can seek indemnity from the labor contractor for violations.  Therefore, it is important for employers who are covered by Labor Code section 2810.3 and who are obtaining workers through a labor contractor to ensure the labor contractor is meeting all wage and workers compensation requirements, and negotiate an indemnity provision in the contact with the labor contractor should any liability arise.

4.      Even if there is found to be a joint employer relationship, there is no personal liability for unpaid wages under CA law (but see item #5 below)

California law does not hold corporate officers or directors personally liable for unpaid wages by the corporate employer.  See Reynolds v. Bement, 36 Cal.4th 1075, 1085 (2005).  This is different than the FLSA, which does impose liability on “any person” acting on behalf of the employer  for unpaid wages.  It is important to note that under California law personal liability could still be imposed on a company’s officers or owners under the alter ego theory.

5.      However, there may be personal liability for civil penalties imposed under CA law

In addition, the California Labor Code’s civil penalties could be imposed on individuals.  For example, Labor Code section 558(a) provides that “any employer or other person acting on behalf of an employer” who violates or causes a violation could be held personally liable for applicable civil penalties.  Labor Code section 1197.1 that applies to minimum wage likewise holds individuals potentially liable for civil penalties for failure to pay minimum wages.  See Labor Code section 1197.1.  Therefore, employers need to review and set up policies and practices to ensure that they do not find their companies, and potentially themselves personally liable for liability created by an outside agency that supplies workers for to them.

This Friday’s Five covers five employment law developments that occurred in August 2015 that will have an impact for employers in California.

1)     NLRB ruling widens which companies may be considered “joint employers”

In a 3-2 decision, the NLRB ruled that Browning-Ferris Industries of California, Inc. was a joint employer with a staffing agency, Leadpoint Business Services, and therefore the employees of Leadpoint have bargaining rights with Browning-Ferris Industries.

The NLRB’s opinion stated that given the increase in employment placement agencies and temporary help services projected to be employing as many as 4 million employees by 2022, it “is reason enough to revisit the Board’s current joint-employer standard.”

The NLRB set forth this new standard:

 Under this standard, the Board may find that two or more statutory employers are joint employers of the same statutory employees if they “share or codetermine those matters governing the essential terms and conditions of employment.”  In determining whether a putative joint employer meets this standard, the initial inquiry is whether there is a common-law employment relationship with the employees in question. If this common-law employment relationship exists, the inquiry then turns to whether the putative joint employer possesses sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining.

The NLRB also explained that the mere ability to control employees, even if never actually used in the workplace, would still be sufficient to establish a joint employment relationship:

 We will no longer require that a joint employer not only possess the authority to control employees’ terms and conditions of employment, but also exercise that authority. Reserved authority to control terms and conditions of employment, even if not exercised, is clearly relevant to the joint-employment inquiry.

This ruling will likely be appealed to the courts for review.  However, the ruling could have an impact upon employers who don’t have union workers, as the NLRB decisions are often times relied upon by courts as persuasive authority.

2)     Minimum wage increase stalls in state legislature

As written about previously, a bill, SB 3 proposed increasing California’s minimum wage to $11 per hour on January 1, 2016 and then again to $13 per hour by July 1, 2017.  Then beginning on January 1, 2019, the minimum wage would have been indexed to inflation and would be adjusted upward every year afterwards.  The bill was held in committee by the Assembly Committee on Appropriations this week, and will not likely make it out of the Committee this year.

3)     California Supreme Court addresses arbitration agreements and what makes such agreements “unconscionable” and therefore unenforceable

In a consumer case, the California Supreme Court ruled in Sanchez v. Valencia Holding Company that an arbitration agreement that contained a class action waiver was not unconscionable, and therefore enforceable.  The Court explained that the “unconscionability doctrine ensure that contracts, particularly contracts of adhesion, do not impose terms that have been described as …’so one-sided as to ‘shock the conscience’”.  The Court noted that because unconscionability is a contract defense, the party asserting the defense bears the burden of proof.  The Court ultimately held that plaintiff could not meet this burden in establishing that the arbitration agreement was unconscionable, and therefore could not proceed as a class action.  Even though this case was in the consumer context, the ruling will apply to the enforcement of arbitration agreements with class action waivers in the employment context as well.

4)     Bill precluding mandatory arbitration agreements passes legislature and sent to the Governor for his consideration

Speaking of arbitration agreements, AB 465 is a bill that prohibits employers from utilizing mandatory arbitration agreements was passed by the legislature this week.  Now it is up to Governor as to whether the  bill becomes law.  The bill prohibits “any person from requiring another person, as a condition of employment, to agree to the waiver of any legal right, penalty, forum, or procedure for any employment law violations.”  The bill also shifts the burden of proof onto the employer enforcing the waiver to show that the waiver was “knowing and voluntary.”  Violation of these provisions carry a penalty of $10,000 per violation plus attorney’s fees to the prevailing employee.

5)     Studios fail to have antitrust class action dismissed, which alleges the studios engaged in a conspiracy to fix employee compensation and restrict mobility

Case sounds familiar, right?  As the court noticed in its opinion the case is very similar to the High-Tech Employee Antitrust class actions alleging Adobe, Apple, Google, Intel, Intuit, Pixar, Lucasfils and eBay, alleging the companies had “no cold call” agreements to limit the requiring of high tech workers.  This made Steve Jobs’ email response back to Eric Schmidt infamous, which only consisted of a smiley face when he was told that the recruiter who violated the no call rule was terminated.

In this case, the plaintiffs allege that Blue Sky Studios, DremWorks Animation SKG, ImageMovers Digital, Lucasfilm, Pixar, Sony, and Disney all had a scheme not to actively solicit each other employees and that the studios engaged in “collusive discussions in which they exchanged competitively sensitive compensation information and agreed upon compensation ranges,” that would keep the salaries artificially low in the industry.  The court denied defendants’ motion to dismiss, permitting plaintiffs to litigate the case.