Employer Liability: The Joints Are Jumpin'
Lynne C. Hermle
GC California Magazine
June 10, 2008

Plaintiffs counsel have become increasing adept at crafting new theories of employer liability in wage-and-hour class actions.

One current trend is to attack companies for alleged violations they did not actually commit. Within this trend, plaintiffs are relying on joint employer and similar allegations to attempt to hold employers liable for wage practices of their contractors, subcontractors or temporary employment agencies. In fact, plaintiffs' counsel predict that this tactic will be used frequently in wage-and-hour class actions throughout the next several years.

That prediction is borne out in my own practice, which currently includes several joint employer cases. Some involve temporary or staffing agencies. For example, one of my clients uses temporary employees hired through agencies for its fluctuating business cycles. It is now alleged to be jointly liable, along with the temporary agencies, for penalties for what are claimed to be late final paychecks from the agencies. The paychecks are allegedly late because they were not paid on the final day of an employee's temporary assignment even though the employee returned to the agency to be dispatched somewhere else.

According to the plaintiff, all conclusions of temporary assignments are "terminations" under California Labor Code §203, which requires that terminated employees be paid all wages due immediately -- or receive up to 30 days' wages as a penalty. The case involves legal issues that have not been fully resolved by California courts, including, among others, the circumstances under which the end of a temporary assignment might be a termination; when a temporary employee employed with an agency is jointly employed with the agency client; and whether that client could have willfully failed to pay the temporary employee when, by contract, the agency has contractually committed to paying the employee lawfully.

Companies that use contractors, such as workers who install their products at customer locations or provide marketing or other services on the company's sites, are now alleged to be jointly liable for wage violations by their contractors even though they may not have any significant contact with the contractor's employees or even any information about their wages, duties, names or addresses or other information necessary for the payment of wages.

How likely is joint liability for wage claims? California and federal law typically focus on a "control" test in assessing whether an employee is jointly employed, although the tests may differ somewhat. Joint employment arises under California law only "where two or more employers exert significant control over the same employees -- where from the evidence it can be shown that they share or co-determine those matters governing essential terms and conditions of employment."

Generally, determining whether an employer-employee relationship exists requires an examination of the totality of the circumstances, such as a review of which employer hired, supervised, directed tasks, set wages or hours, provided benefits and similar such facts. One California case has held that there is "no magic formula" for determining joint employment, stressing that the issue is to be decided on a case-by-case basis. Federal courts may also apply an "economic realities" test to determine whether two entities working closely together both qualify as employers.

In addition to joint employment issues, potentially dangerous claims also arise under California Labor Code §2810, which prohibits a party from entering into a services agreement with a janitorial, construction, garment, farm labor or security guard contractor when that party "knows or should know that the contract … does not include funds sufficient to allow the contractor to comply with all applicable local, state and federal laws or regulations governing the labor or services to be provided."

What on earth does that mean? When should a company -- particularly one in another industry -- know that a contract doesn't allow a janitorial or security agency to comply with all wage, overtime or meal break requirements? And the penalties are stiff. "Aggrieved" employees can bring an action to recover the greater of actual damages (presumably, the overtime or meal break penalties allegedly not paid because of the contract price) or $250 to $1,000 per employee for each violation.

To protect against efforts to hold your company liable for another's wage practices, consider the following steps:

• Know your business partners.

If you are working closely with contractors, subcontractors or temporary or staffing agencies on a regular basis, you may be alleged to be a joint employer of employees of those entities. Ask for assurances that the partner is in compliance with wage-and-hour laws (particularly if you are in a state like California that has strict Labor Code provisions and the other company is headquartered elsewhere).

A history of litigation, ongoing employee grievances and similar information is worth exploring, especially in a privileged setting. If the business partner is under attack for practices in classifying employees as exempt, failing to compensate employees, provide breaks or other alleged violations, attempt to understand whether the claims have merit, whether they are being resolved and the likelihood you may be brought in as a possible deep pocket.

• Protect your company contractually to the extent possible.

Don't rely solely on agreements that provide that a business partner indemnifies you for claims made by its employees. Insert language into your contract that provides that the partner's employees who work on your premises (or your customers' premises) will be compensated in accordance with all applicable laws. If possible, add specific provisions that apply to your setting. For example, while the temporary agency claims described above continue, consider requesting that the agency's employees be paid at the end of the temporary assignment with you to avoid contentions that they were not properly paid upon termination within the meaning of California law.

• Follow up promptly on any information suggesting that employees are not being lawfully paid.

Contract clauses may not help you if you are on notice of actual wage violations, late final paychecks, failure to pay overtime to nonexempt employees and similar issues. If you are aware of claims that employees are not being paid properly, take steps to address the situation quickly. Document discussions with the business partner confirming that those issues will be addressed promptly and that failure to do so threatens the relationship. And be sure to follow up. If corrections are not made or your concerns are otherwise not resolved, consider ending the relationship if possible.

• Limit your company's control over those not directly employed by the company.

The surest way to become a joint employer is to exercise significant control over another entity's employees. Consider whether employees can allege that you have made decisions about their qualifications, hiring, wage rates, work standards or performance or are responsible for discipline. Recognize that ongoing involvement in these areas may increase your risk of being alleged to be a joint employer.

• Recognize the danger of §2810 when operating in California.

To avoid liability for janitorial, security or other covered contracts that allegedly prohibit compliance with wage laws, pursue due diligence. Section 2810 suggests that there may be facts that would "make a reasonably prudent person undertake to inquire" whether the contract contains sufficient funds. Document your investigation and discussions and demand written assurances that the amount of the contract allows the company to compensate its employees in compliance with all laws. Designate someone to oversee the diligence and maintain the evidence; you may need it.

• Finally, get your own insurance in order.

Insurance policies may not cover claims of another entities' employees against you. Determine whether your policies do and, if not, consider obtaining coverage. Insist that the contracting agency or business partner maintain sufficient coverage so that claims brought by its employees may be covered.