In the case of Martinez v. Combs, 49 Cal.4th 35 (2010), the plaintiffs worked as seasonal agricultural workers for a grower that grew and harvested strawberries. The grower contracted with various produce broker entities that acted as distributors of the grower’s harvest. The grower later went bankrupt, and its workers sued two of the distributors and the distributors’ principals for unpaid wages under the California Labor Code, claiming a joint employment relationship.

The workers argued that the proper definition of “employer” is found in the California Wage Orders, and that the distributors fall under that broad definition. The distributors contended that the Wage Order definition of “employer” should be narrowed by incorporating the “economic reality” definition developed under the federal law. The California Supreme Court agreed with the workers that the Wage Order broadly defines “employer,” but under the facts of this case, held that such definition did not cover the distributors or the distributor’s directors or officers and rejected the workers’ contention that the distributors’ relationship and actions vis-à-vis the workers made them a joint employer.

In applying the Wage Order definition of “employer” to the facts before it, the Court pointed out there are indeed situations in which multiple entities could control different aspects of the employment relationship (i.e., joint employment). However, here, the Court noted that the grower, and not the distributor, hired and fired its employees, trained them, supervised them, told them when and where to report to work, when to start, stop and take breaks, provided their tools and equipment, set their wages, paid them, handled their payroll and taxes, and purchased workers’ compensation insurance. The Court clarified that, for a company (such as the distributor) to “suffer or permit” work, it must both know that persons are working within the business without being formally hired or are being paid less than the minimum wage and failed to prevent it while having the power to do so.

Practical Impact

While the Court ultimately decided that the distributors and their principals were not liable for unpaid wages, the ruling gives workers the means to cast a wider net when suing over unpaid wages since the Wage Order defines “employer” in a broad manner. This will lead to multiple defendants being named in these lawsuits, thereby increasing the potential for lucrative settlements because, even if a joint employment relationship is found to not exist, the determination is often made only after the defendants are forced to incur substantial litigation costs.
Given these issues, companies with a close business relationship with another company (e.g., parent/subsidiary, franchisor/franchisee, consignor/consignee, manufacturer/distributor, supplier/retailer) must be aware that the label of “employer” is not determinative, rather, it is a legal question based on the substance of the inter-relationship. Therefore, proactive steps are necessary to ensure that a company is not unknowingly transforming itself into a joint employer of the other company’s employees. 

Agreements should be reviewed to make certain that they specify which company is responsible for selecting, hiring, firing, supervising, training, assigning, and setting the wages, hours and working conditions for employees. More importantly, the parties must follow the agreements and avoid dictating labor costs or working conditions when it is beyond the scope of the delineated roles. Indeed, a company may not shield itself from liability by exercising this level of control through a straw man or some other sham arrangement. Additionally, agreements should set forth each company's indemnity obligations to each other with respect to the company’s workers and should include representations that the named employer will comply with all applicable wage and hour laws.