California Supreme Court Defines "Employer" in Wage Hour Cases

In 2005, the California Supreme Court held in Reynolds v. Bement (2005) 36 Cal.4th 1075, that individual agents / managers cannot be held liable as "employers" under California wage-hour law. In Martinez v. Combs, opinion here, the court similarly held that investors / business partners could not be held liable as "employers" either.

To get there, the Court engaged in a rigorous, painstaking (euphemisms for tedious) analysis of the history of California wage-hour laws, all the way back to the Magna Carta, or so it seemed.

But the Court did something that had not been done before. It came up with a framework for deciding just what entity can be held liable for unpaid wages.

This case arises because Munoz, the employer that hired, supervised, and (previously) paid its farm workers, went bankrupt. So, the case has relevance during these troubled times. Munoz operated a strawberry harvesting operation. Because of lower strawberry prices and financial reverses, Munoz could not pay its workers and then declared bankruptcy.

Unable to recover from Munoz, the employees sued: "two of the produce merchants through whom Munoz sold strawberries: Apio, Inc. (Apio), and Combs Distribution Co., together with its principals, Corky and Larry Combs, and its field representative Juan Ruiz (collectively Combs). Plaintiffs’ separate action against a third merchant, Frozsun, Inc. (Frozsun), has been stayed pending the outcome of this action."

The Labor Code does not specify who is liable for unpaid wages under Lab. Code Section 1194:

Notwithstanding any agreement to work for a lesser wage, any employee receiving
less than the legal minimum wage or the legal overtime compensation applicable to the employee is entitled to recover in a civil action the unpaid balance of the full amount of this minimum wage or overtime compensation, including interest thereon, reasonable attorney’s fees, and costs of suit.

The Court first decided that liability under Section 1194 is limited to an "employer" under the Industrial Welfare Commission's Wage Orders. The Wage Orders do define "employer." As the Court related:

Employ’ means to engage, suffer, or permit to work,” and “ ‘[e]mployer’ means any person as defined in Section 18 of the Labor Code, 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.”

So, who is an employer? The Court said that under the IWC's definition, one can become an employer in one of three ways:

To employ, then, under the IWC’s definition, has three alternative definitions. It means: (a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.
Suffer or permit - The Court clarified that to "suffer or permit" someone to work results in a finding of employer only when the person permitting the work has the power to stop it. The vendors / defendants could not stop or prevent the work. Munoz had all the power to hire or fire his own workers.

Regarding the "control over the wages hours and working conditions," the Court rejected the claim that the vendors' financial relationships with Munoz resulted in de facto control over the plaintiffs' working conditions.

Finally, "to engage" means that the employer hires the employees to work, which is the straightforward way of establishing an employment relationship. There was no such evidence in this case.

So, this test will be used to define who is liable under California law as an "employer," with the exception of the employer's agents / employees. The employer's own agents and employees are not liable under Reynolds v. Bement, cited above. If the IWC changes the definition of "employer," then this case may be superseded. But the Legislator has all but abolished the IWC. So, the Legislature will have to define the employment relationship or reconstitute the IWC to change the effect of this case.

The opinion in Martinez v. Combs is here.