Seyfarth Synopsis: On June 30, 2022, the California Supreme Court determined that the interdependent relationship between employers and the staffing agencies with which they contract does not necessarily mean the two are in “privity.” As a result, the employer could not take advantage of a settlement agreement and judgment entered into between a staffing agency and employees who it assigned to work at the employer. Grande v. Eisenhower Medical Center.

The Facts

In February 2012, FlexCare, a temporary staffing agency, assigned Lynn Grande, a nurse, to work at Eisenhower Medical Center. As a class representative, Grande joined a class action lawsuit against FlexCare alleging wage and hour violations during the time she worked at Eisenhower, which was not named as a defendant in this lawsuit. FlexCare and the class reached a settlement, which the court entered as a judgment. The settlement agreement listed FlexCare and various entities as released parties. Eisenhower, however, was not among the listed entities, even though Grande and other class members had been assigned by FlexCare to work there.

After the judgment in the first lawsuit became final, Grande sued Eisenhower for the same wage-hour violations she had previously asserted against FlexCare. FlexCare filed a complaint in intervention, seeking declaratory relief. Both FlexCare and Eisenhower argued that Eisenhower was entitled to the benefit of the release, and that the judgment in the first lawsuit precluded the second one.

The Trial Court Decision

The trial court found that, based on the language of the settlement agreement (which did not include Eisenhower in the list of released parties), the release did not extend to the claims Grande had against Eisenhower.

The trial court further concluded that FlexCare was not “in privity” with Eisenhower, meaning that Eisenhower could not rely on the judgment in the first lawsuit to preclude the second one. The trial court reasoned that, had Grande held Eisenhower derivatively liable for the violations of the law by FlexCare, then preclusion of the second suit would be appropriate. But the trial court found no support for the argument that potential joint employer liability between FlexCare and Eisenhower constitutes derivative liability justifying preclusion of the suit. As a result, the trial court entered judgment in favor of Grande.

The Court of Appeal Decision

The Court of Appeal agreed with the trial court that the settlement did not release Grande’s claims against Eisenhower. The Court of Appeal also affirmed the trial court’s determination that FlexCare was not in privity with Eisenhower and, as a result, the first judgment did not preclude the second suit. The decision of the Court of Appeal ran contrary to another appellate court decision, Castillo v. Glenair, which held that a staffing agency and a client-employer were in privity for purposes of claim preclusion.

The California Supreme Court Decision

The California Supreme Court affirmed the judgment of the Court of Appeal, disapproving Castillo, and holding that FlexCare and Eisenhower were not in privity for purposes of preventing the second lawsuit against Eisenhower.

For there to be privity, the Court held, Eisenhower and FlexCare needed to share an identity or a community of interest, with adequate representation of that interest in the first lawsuit, such that Eisenhower should reasonably have expected to be bound by the result of the first lawsuit. Privity “does not exist merely because two entities are allegedly liable for the same wrong to the same plaintiff,” the Court explained.

Here, the Court noted, FlexCare declined to concede that it would have to indemnify Eisenhower for all the alleged violations Grande asserted in the second suit. This, in turn, suggested “a conflict of incentives rather than adequate representation.” Further, the Court reasoned, Eisenhower may have had an interest in shifting fault to FlexCare for some alleged violations. Ultimately, the Court concluded, FlexCare and Eisenhower’s divergent interests prevented a finding of privity.

What Eisenhower Means for Employers

It is now clear that employers that contract with nurse registries and other staffing agencies should not assume that a release of claims entered into by the staffing agency will operate as a release of claims against the employer.

Thus, employers using staffing agencies must be proactive and include clauses in the staffing agency agreements that provide, for example, that the staffing agency is responsible for compliance with all employment laws, including wage-hour laws; will indemnify, defend, and hold harmless the employer from all employment claims; must notify the employer if a claim is brought against the staffing agency that involves services by a worker assigned by the staffing agency to work at the employer; include the employer as a named releasee in a settlement involving such workers; and provide the employer with the ability to audit the employment practices of the staffing agency.