In Happy Nails & Spa of Fashion Valley, L.P. v. Su, a California appellate court held that a determination by one state agency was binding on another state agency and precluded the second agency’s contrary finding.

In 2003, Happy Nails (and its related salons) reorganized its business to make its cosmetologists independent contractors instead of employees. In 2004, the California Employment Development Department (“EDD”) issued assessments against Happy Nails for unpaid unemployment contributions, alleging that the cosmetologists were employees and not contractors. Happy Nails opposed the assessments and, following a two-day hearing on the issue, the administrative law judge held that the cosmetologists were in fact independent contractors because they were not terminable at will, they provided their own equipment and most of their materials, and Happy Nails exercised no control over them.

In 2008, the Labor Commissioner at the California Division of Labor Standards Enforcement (“DLSE”) cited Happy Nails and assessed penalties for failure to provide the cosmetologists with itemized wage statements. Happy Nails opposed, arguing that the EDD’s prior determination that the cosmetologists were independent contractors barred the DLSE’s citation under a theory of collateral estoppel (i.e., once an issue has been litigated and decided, it should have a binding, dispositive effect). The company stated that it had already spent hundreds of thousands of dollars and “borne the burden of years of administrative proceedings” in the EDD matter. After a full day hearing, during which the evidence presented was substantially similar to that at the earlier EDD hearing, the hearing officer affirmed the citation and penalties, finding that the cosmetologists were employees.

Happy Nails then engaged in a long and tortured appellate process, finally resulting in an appellate court ruling that accepted Happy Nails’ collateral estoppel argument and set aside the DLSE’s findings. The court noted that the issue before both agencies — whether the cosmetologists were employees or contractors — was identical; the issue was actually litigated and decided in the EDD proceeding; the EDD’s determination was final and on the merits; and the EDD and DLSE had substantially similar purposes and objectives (i.e., to enforce laws designed to benefit and protect employees) such that a decision by one on the same issue should bind the other. The court recognized that giving the EDD’s decision preclusive effect “fosters the integrity of both administrative and judicial proceedings” and avoids a “manifestly unfair” situation in which two similar state agencies reach different conclusions on the same issue.

Employers are justifiably celebrating this favorable — and logical — outcome; if one state agency determines that workers are independent contractors, a similar state agency should not reach a contradictory conclusion. It is important to recognize, however, that the effects of this ruling could just as easily be negative for employers: If the EDD had determined that the workers were employees, then the DLSE could have argued that this decision was controlling in its case. In all events, this ruling underscores the importance of legal advice and representation in administrative hearings since their rulings could have a binding effect on related agency investigations and assessments.