Up-to-date information for employers on topics and issues that may affect workplace operations. The posts are current as of the date of the posting.


by Jennifer Brown Shaw and Alayna Schroeder | The Daily Recorder | Sep 21, 2010

Who is an employer? Despite the seeming simplicity of the question, courts have struggled with the concept in various contexts. For example, courts have defined the term for purposes of establishing the responsibility to provide leave under the Family and Medical Leave Act (FMLA), to prohibit workplace discrimination, and most recently in Martinez v. Combs, to comply with wage and hour laws.

The Facts of Martinez v. Combs

Isidro Munoz owned Munoz & Sons, a strawberry farming operation that employed the plaintiffs as seasonal agricultural workers. Munoz contracted with produce merchants to sell his strawberries, including two of the defendants, Apio and Combs. Munoz ran the business and was in charge of hiring, firing, training, telling employees where to report to work and when to start and stop, setting their wages, paying them, and handling payroll, taxes, and workers’ compensation insurance. Munoz also hired foremen who supervised the employees. However, Apio and Combs had field representatives who visited the fields to ensure quality control and contract compliance. Those representatives interacted with Munoz’s employees, for example, by explaining how to pack the strawberries.

Eventually, Munoz encountered financial trouble and had difficulty paying his workers. This led to a work stoppage in one of Munoz’s fields. While Munoz was trying to get back to work, Combs’ field representative, Juan Ruiz, arrived and spoke with the workers. According to one worker, Ruiz explained that Combs would deliver checks to Munoz and guaranteed the workers would be paid. Ruiz told the workers to “help Munoz” and keep working. Some of the employees were persuaded to return to work, while 75 others refused to do so.

A DLSE investigator, Paul Rodriguez, looked into claims by Munoz’s workers that they not been properly paid. Rodriguez met with Apio vice president Tim Murphy, and asked Murphy to pay the workers directly. Murphy refused because Apio owed the money to Munoz, not his employees. At the DLSE’s suggestion, Apio and Munoz agreed that Apio would pay Munoz, who would then immediately issue cashier’s checks to the employees.

Unfortunately, Munoz did not recover financially, and filed for bankruptcy while still owing wages to the workers. The plaintiffs filed a lawsuit claiming various wage and hour violations, including failure to pay minimum wages under California Labor Code section 1194. In addition to Munoz, the plaintiffs named three defendants who sold his strawberries, including Apio and Combs. The plaintiffs argued, among other things, that Apio and Combs were their “employers” and thus liable for paying their wages.

The Court of Appeal’s Ruling

The trial court rejected the plaintiffs’ argument that Apio and Combs were their “employers” and granted summary judgment for the defendants, effectively putting a stop to the case before a trial ensued. However, the court of appeal reversed the portion of the trial court’s decision on that issue. Recognizing that there is no case law interpreting the definitions of “employ” and “employer” under the California Industrial Welfare Commission’s (IWC) Wage Orders—the regulations that provide rules about wages and working conditions for employees in the state—the court applied the “economic realities” test set out by the federal Fair Labor Standards Act (FLSA).

To determine if an entity is an “employer” under the FLSA, the economic realities test considers factors such as the extent of the alleged employer’s ability to control, hire, fire, and discipline the person, the nature of the person’s duties, and how wages are paid. Applying this test, the court concluded that Apio and Combs did not exercise sufficient control over the plaintiffs, or Munoz’s business, to be joint employers. For this reason, the court affirmed the lower court’s denial of summary judgment. The plaintiffs appealed and the California Supreme Court granted review.

The Supreme Court Defines “Employer”

The Supreme Court was faced with deciding whether, for purposes of establishing liability for failing to pay the plaintiffs’ the minimum wage under California Labor Code section 1194 and other wage and hour violations, Apio and Combs were the plaintiffs’ “employers.” While the law establishing the right to a minimum wage has been around since 1913, no court had yet to define the “employer” responsible for paying it. The only case addressing the definition of “employer” under section 1194, Reynolds v. Bement, applied the common law definition of “employer.” That definition 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 that case applied this definition to determine that corporate agents were not personally liable when the corporation did not pay the employees’ wages.

To determine whether the same definition applied in the Martinez case, the Supreme Court considered the language of the wage orders and the history of California’s wage law. The Court determined that the legislature intended to defer to the IWC’s definition of the term “employer” because it delegated to the IWC broad authority over wages, hours, and working conditions. This included the power to adopt rules to make the minimum wage effective.

The IWC’s definition of “employer” is very broad and includes any person who “employs or exercises control over the wages, hours, or working conditions of any person.” “Employ” under the wage orders means “to engage, suffer, or permit to work.” The Court found that for purposes of section 1194, to “employ” includes both the common law definition and the definition in the wage order, and means: (a) to exercise control over the wages, hours, or working conditions, (b) to suffer or permit to work, or (c) to engage an employee to work.

Applying the Definition

In evaluating the Martinez case, the Court provided additional guidance to interpret the meaning of “employer.” First, the Court looked at whether Apio and Combs had “suffered or permitted’ the plaintiffs to work. The Court explained the term in historical context. It was intended to cover situations in which the proprietor of a business knew child labor was occurring in the enterprise, but failed to prevent it.

In the instant case, the fact that the defendants benefited from the plaintiffs’ work did not make them the employers who had “suffered or permitted” them to work. Munoz and his foremen had the power to hire and fire, set wages and hours, and tell the workers when and where to report to work. Apio and Combs did not exercise this kind of control.

The Court then considered whether Apio exercised indirect control over the plaintiffs’ wages and hours because plaintiffs alleged that through its contractual relationship with Munoz, Apio “dominated” Munoz’ business financially. In essence, the plaintiffs sought to prove Munoz was simply acting as an agent of Apio. The Court rejected this argument as well, again because Munoz controlled the employees’ wages, hours, and working conditions. Any control Apio exercised was pursuant to the terms of its contract with Munoz, and over their business relationship, not the employees and their working conditions. Munoz remained responsible for the operation, selling to different merchants and combining revenue with the hope of turning a profit, and paying employees out of that revenue. He also had revenues and losses from other sources. In other words, Munoz was not a “straw man” for Apio.

Also, the Court rejected the argument that by cooperating with the DLSE to ensure they were paid, Apio “controlled” the employees. Apio paid Munoz, and the Court refused to punish Apio for its role in helping to ensure the employees received their wages.

The Court also evaluated whether Combs exercised control over the plaintiffs’ wages and hours because Ruiz, Combs’s employee, convinced the employees to return to work by guaranteeing them that they would be paid. The Court conceded that if Ruiz, acting as Combs’s agent, promised that Combs would pay them, then Combs would be the “employer,” Instead, Ruiz asked the workers to “help Munoz” and told them Munoz was “not yet utterly without funds to pay them” because he was still receiving payments from Combs. He did not promise Combs would pay them directly. Also, the plaintiffs were not working for Combs that day because in addition to packing fresh strawberries for Combs to sell, they were also picking freezer berries for another client, and they knew that.

Finally, the Court rejected the plaintiffs’ argument that Apio and Combs were joint employers because they exercised control over working conditions through the field representatives who worked in quality control and contract compliance. While the representatives spoke with the employees about the manner in which the strawberries were packed, the evidence did not show they supervised them.

Thus, even considering the broad definition of “employer” in the IWC’s wage orders, Apio and Combs were not the plaintiffs’ “employers.”

Lessons for Employers

What can businesses learn from the Martinez case? First, to avoid being characterized as “employers” of entities with which they do business, businesses must carefully draft contracts to clearly delineate their relationship with contractors and respective roles. Then, they must stick to those agreed upon roles. For example, in Martinez, Apio refused to circumvent its business relationship with Munoz and pay the plaintiffs directly, even at the DLSE’s request, pointing out that its contractual duty was to Munoz, not the employees. Businesses can draft contracts to specify that the contracting entity is responsible for its employees, and for paying them in accordance with wage and hour laws.

Also, organizations must think carefully about how their own employees interact with others with whom they do business. For example, the defendants’ field representatives in Martinez performed quality control and contract oversight functions, but the responsibility to supervise the plaintiffs’ remained Munoz’s. Munoz also directed where the employees worked, how and when they would be paid, and the like. Even though the field representatives were responsible for ensuring the end product, they did not interfere with Munoz’s right to control the supervision of the employees.

Moreover, the Martinez decision reminds employers to think carefully about their relationships with other workers, such as independent contractors and temporary employees placed through employment agencies. Employers should recognize that these individuals may be considered “employees” for certain purposes, including establishing liability for wage and hour violations, if the business exercises sufficient control over hiring, training, supervision, termination, and the like.

Finally, all businesses must understand the wage and hours laws that may apply to them as either primary or joint employers. The Martinez opinion emphasized the IWC’s role in regulating wages and working conditions, and in enacting rules and regulations to affect that purpose. The IWC has done just that through its wage orders, which contain many of the important details about common wage and hour issues, such as minimum wages, overtime, and rest and meal periods. However, the wage orders also contain details about less well known requirements, such as creating valid alternative workweek schedules, the duty to provide seating for employees, and providing changing rooms. In short, employers should look to the wage orders to ensure they are complying with all applicable wage and hour laws.