When an employee is not paid minimum wage for hours worked, who is liable as the employer? In 2005, the California Supreme Court, in Reynolds v. Bement, applied the common law definition of employer to hold that a corporate employer’s directors and officers were not personally liable for the corporation’s failure to pay overtime compensation to the corporation’s employees. On May 20, 2010, however, in Martinez v. Combs, another case involving the same Labor Code statute (section 1194), the California Supreme Court revised its analysis and expanded the definition of “employer” for purposes of wage claim liability under Labor Code section 1194. Specifically, the Court in Martinez adopted the broader California Industrial Welfare Commission (IWC) definition, which extends employer liability to anyone who exercises control over a worker’s wages, hours, or working conditions or who suffers or permits a worker to work without the minimum wage, or who engages a worker to work. Although the Court ultimately affirmed a summary judgment for the defendants, finding them not to be “employers” in this case, the Court’s expanded definition of “employer” definition will potentially subject more entities to wage claim liability.

The Facts

In 2000, Isidro Munoz contracted with produce merchants Apio, Inc. and Combs Distribution Co. to provide them with strawberries. Munoz employed up to 180 individuals to grow and harvest strawberries. Munoz hired and fired his employees, and supervised them in the field. Although field representatives from Apio and Combs occasionally visited the fields to ensure the strawberries were correctly packaged, they did not supervise the workers. Munoz sent the strawberries to Apio and Combs, who sold and distributed them for a fee.

During 2000, there was a glut of strawberries on the market; prices plunged and Munoz found it difficult to pay his employees. Ultimately, six workers filed a complaint for wages against Munoz, Apio, Combs and Combs field representative Juan Ruiz. After Munoz filed bankruptcy, the plaintiffs sought to recover unpaid wages from Apio, Combs, and Ruiz. The crux of the workers’ claims was that Apio and Combs were “employers” as defined by IWC Wage Order 14, and therefore they should be held liable under Labor Code section 1194. The trial court granted summary judgment, and the Court of Appeal affirmed, finding Apio and Combs not to be the plaintiffs’ employers. The plaintiffs sought review in the Supreme Court.

The California Supreme Court Redefines The Meaning Of “Employer”

The Court first acknowledged that Labor Code section 1194, which entitles employees to recover the minimum wage, does not identify who is liable as an employer. In Reynolds, the Court previously held that the “common law” definition of employer applies to section 1194 claims. After analyzing section 1194 and its legislative history, the Court departed from its reasoning in Reynolds and held that in actions to recover unpaid minimum wages courts must follow the broad definition of employer that appears in the IWC wage orders. The Court made clear that even under this broad definition, however, “employer” does not include individual managers or corporate agents acting within the scope of their employment. Reynolds, therefore, is still good law but is limited to that narrow holding.

The Court held that, under the IWC’s definition, “to employ” has three alternative definitions: (1) to exercise control over the wages, hours or working conditions, or (2) to suffer or permit to work, or (c) to engage. The Court expressly rejected the “economic realities” test of the federal Fair Labor Standards Act for determining who is an employer for a California wage claim.

Applying IWC Wage Order No. 14’s definition of “employer” to Apio and Combs, the Court held that they were not “employers” who could be held liable for the workers’ unpaid wages. In doing so, the Court focused on the first two factors: whether Apio and Combs “exercised control” over the workers, or whether they suffered or permitted them to work.

Apio And Combs Did Not Exercise Control Over The Workers

First, Munoz operated “a single, integrated business operation,” in which his foremen supervised his workers, he decided which field to pick, he provided the workers with all necessary equipment, and he set their compensation rates and determined how many hours they should work. Apio and Combs’ business relationships with Munoz alone did not give them control over the workers’ wages, hours, or working conditions.

Second, although a promise to pay a person for work would be an offer of employment, as well as an exercise of control over wages and hours sufficient to qualify the promisor as an “employer,” the evidence demonstrated that Apio and Combs had simply promised to pay Munoz, who in turn would pay the workers.

Finally, although supervising the work of an employee would demonstrate control, the Apio and Combs field representatives did not “supervise” workers, but merely conducted on-site quality control and contract compliance during the packaging phase of the harvest.

Apio And Combs Did Not Suffer Or Permit The Workers To Work

The Court construed the “suffer or permit” language to contemplate a situation where a proprietor knows that persons are working in the business without being paid the minimum wage, and fails to prevent or correct that situation. The plaintiffs argued that the definition of “suffer or permit” should be construed broadly to include anyone who benefits from the work of another, but the Court rejected this argument as proving too much: it would create “potentially endless chains of liability.” Under its narrower formulation, the Court found that Apio and Combs, being merely substantial purchasers of commodities, did not thereby become “employers” of their supplier’s workforce.

What Martinez Means For Employers

This Supreme Court decision expands the Reynolds test for determining whether an entity is an “employer” who may be subject to liability for unpaid wages under Labor Code section 1194. Although the defendants ultimately prevailed in Martinez, the expanded definition of employer will encourage plaintiffs’ lawyers and the Labor Commissioner to pursue related entities in wage hour litigation whenever it appears that the nominal employer is unable to satisfy a judgment for unpaid wages.