Multi-state and national employers eventually can’t help but discover that California is in its own universe of employment law, one where core federal laws may apply but only to the extent California has not established its own more stringent or employee-protective rules in key areas such as wage and hour laws, minimum wages, family and medical leave, disability accommodation, vesting of commissions, and employee privacy. A specific area of growing importance in the modern business world of flat organizational structures, core organizational competencies, and the use of service contractors (vendors) for flexible staffing needs, is exposure to co-employment claims – where a business customer which has used a service vendor becomes a target for claims of employment law responsibility for the vendor’s employees – a not uncommon and not uncomplicated situation. In this context, the California Supreme Court issued an instructive, fact-intensive 54-page ruling last month in a case maintained by workers against the customers of their employer, claiming in essence that the customers are responsible for payment of wages and alleged failures of wage/hour and employment law compliance by their direct employer, on the basis that the customer’s service specifications, performance monitoring and the like make it a joint employer or co-employer with direct responsibility for the vendor’s employees.
Among the notable holdings of the California Supreme Court are that (1) only an “employer” can be liable for the payment of minimum wages or unpaid wages; (2) the operative definition of “employer” is that provided in the wage orders of California’s Industrial Welfare Commission (IWC) which sets basic rules of wages and working conditions for almost all California businesses; (3) the IWC wage orders do not incorporate the federal definition of employment ; (4) the IWC defines “employer” as meaning “any person . . . who . . . employs or exercises control over the wages, hours, or working conditions of any person”, and defines “employ” as to “engage, suffer, or permit to work”. The court also addressed the IWC definition of “employer” in terms of exercising control over employee wages and working conditions, acknowledging common situations where multiple entities control different aspects of the employment relationship, such as temporary employment agencies which hire and pay workers for placement in a customer’s workplace under the customer’s direction and supervision.
The Supreme Court observes that “control over how services are performed is an important, perhaps even the principal, test for the existence of an employment relationship”. However, in applying the IWC wage orders, definitions and above rules to plaintiffs’ specific claims, the Supreme Court did not find that any and every participation, influence or involvement by the customer equates to “control” so as to become a co-employer. Instead the court recognized a non-employer customer’s legitimate interest in requiring from its vendor or contractor, exacting performance of service and product specifications, provided that such matters are communicated to the contractor’s employees and individual employee performance is monitored and directed by the contractor’s supervisors and managers, even if the customer’s managers are onsite to monitor performance of the contractor entity.
Among the takeaways from this important case are that (1) multi-state employers should not assume that federal employment law and definitions are controlling in California; (2) employers should be familiar with the specific provisions of the IWC wage order(s) which apply to their business or to the occupations of their employees (there are over a dozen separate IWCs for different industries and occupations, and their terms are not always identical); and (3) to avoid unintended co-employer status, (a) aim for a strong contract with sole responsibility on the contractor for the wages, hours, working conditions, control and supervision of the contractor’s employees, and (b) respect the employer distinction: best to work through the contractor’s management in monitoring and enforcing service performance and quality control. (Martinez v. Combs, California Supreme Court No. S121552, May 20, 2010)