The general rule is that only the employee’s “employer” is liable for wage and hour violations. However, the definition of “employer” is an evolving area of the law. California’s legislature, federal agencies, and courts have expanded traditional notions of the employment relationship. The expansion helps workers recover wages, penalties and damages from entities that did not hire them. As just one, recent example, AB 1701, effective January 1, 2018, makes general contractors liable for their subcontractors’ employees’ wages and benefits if the subcontractor fails to pay.
Subcontracting, outsourcing, franchising, and other business relationships may involve multiple entities responsible in some way for employment conditions. When businesses are otherwise separate legal entities, they may be considered “joint” employers. Parents and subsidiaries, and sometimes even individuals, may be deemed “single employers” or “alter egos.” A primary purpose of these doctrines is to expand liability and, often, find a capitalized pocket that can finance an adverse judgment or a settlement. Staffing agencies, contractors, small business owners or executives, and businesses that may “share” employees must ensure they understand the risks and, if possible, how to prevent unplanned liability.
Statutory Joint Liability
California Labor Code section 2810.3 creates a joint employment relationship between employers and third parties with whom they contract for workers. Employers with 25 or more employees that use five or more workers at any one time from a third party, both the employer and the third party may be responsible for the payment of wages to the worker. Various are relevant to this analysis, including whether the workers are provided to perform labor within the hiring entity’s usual course of business; whether the workers are exempt or non-exempt, and whether the contractor is a bona fide nonprofit community based organization.
Businesses and labor contractors may include in their agreements specific criteria for the contractors’ compliance with employment laws, how the parties will respond to claims made, responsibility for the defense of claims, and indemnification for settlements, awards, and fees and costs. The prime business should conduct appropriate research to determine whether labor providers have had prior problems with wage and hour compliance.
Also, businesses may explore whether certain, bona fide nonprofit organizations that provide services to its workers, can meet their flexible staffing needs such as organizations that provide employment for persons with disabilities. This type of arrangement exempts the business from joint responsibility for wages under the law.
Common Law Joint Liability
The courts’ joint employer relationship test focuses on the control that a third-party business exerts over the hiring employer’s worker. For example, recently the courts have examined whether the alleged third-party, joint employer has the power and authority to negotiate and set the worker’s wages, the authority to hire or fire the worker, set the worker’s schedules, train and supervise the worker, and instruct the employee when to take breaks.
The California Court of Appeal recently addressed whether Shell Oil and a separate business running a Shell gas station and convenience store were joint employers. In Curry v. Equilon Enterprises, LLC, Curry, a convenience store worker, brought wage and hour claims against both Shell and the gas station that directly employed her. Curry alleged Shell was jointly liable, because Shell indirectly controlled the manner and means of the employee’s work. For example, the gas station had to abide by a Shell operating manual that dictated the gas station’s operations in many respects. However, Shell had no say over whom the gas station employed, except that it could ask the gas station to remove a worker for sufficient cause.
The court declined to extend joint liability to Shell. The contract between Shell and the gas station gave Shell control over certain details, but not over the individual employees’ wages, hours, or working conditions. Although Shell set the gas station’s hours of operation, Shell proved that it did not set Curry’s hours. Similarly, Shell’s manual set expectations for the gas station’s operations, but did not mandate how the gas station used its employees to fulfil those expectations. Further, the agreement stated that the local company – the gas station – was responsible for hiring, firing, disciplining, training, compensating and maintaining payroll records for all employees. Shell had no power to interfere in any of those employment activities. The well-drafted contract foreclosed the application of a joint employment relationship to Shell.
Generally, managers are not liable for personnel-related actions they perform in the course and scope of their employment. Yet, owners and senior management may be held personally liable for corporate employers’ wrongs under certain circumstances.
For example, Labor Code section 558.1(a) provides that a person acting on behalf of an employer who violates, or causes to be violated any wage order governing minimum wages and hours worked may be personal liable for the violation. Certain payroll issues, including incorrect wage statements, improperly issued final pay, and failure to reimburse employment related expenses, may lead to personal liability, even though work is done in the course and scope of the manager’s employment. The courts will examine the relationship between the individual agent and the employee, including whether the individual controls wages, hours, and working conditions, or the ability of the employee to work, to such an extent that it is appropriate to hold that individual responsible.
In sum, the trend is to expand liability for a direct employer’s wrongs to third parties, including contractors and the other parties to business relationships discussed above. New laws and rulings also expand liability to individuals, such as senior management and owners in some circumstances. The potential financial liability for unpaid wages and penalties, particularly when claims are aggregated, are significant. It therefore is critical for businesses to draft their contracts with vendors and service providers to address these issues.
As for owners and managers within an organization, failure to learn even the basic wage hour obligations is too dangerous in today’s regulatory climate. Executives and managers should seek training regarding the fundamentals of California employment laws regarding payment of wages. It is also important to review employing entities’ by-laws and insurance policies to determine if owners, directors, officers, and management are appropriately protected, or if additional coverage is needed.