Understanding joint employer liability

By Anthony Zaller on January 13, 2017

Posted in Best Practices For California Employers, Class Actions, Wage & Hour Law

Joint employer liability can arise in many different contexts, such as when using staffing agencies, management companies, or in even in the franchise context.  Companies must understand the factors a court could apply in determining if a potential joint employer relationship exists between the two entities to avoid being potentially liable for employment lawsuits filed because of the actions of another employer.

The California Supreme Court set out the factors that can create a joint employer relationship in Martinez v. Combs.  Under this test, to “employ” means (1) “to exercise control over… wages, hours or working conditions,” (2) “to suffer or permit to work,” or (3) “to engage, thereby creating a common law employment relationship.”  The court in Ochoa v. McDonald’s Corp. explained that “[a]ny of the three is sufficient to create an employment relationship.”  In addition to the factors that California courts apply, employers must understand the federal framework that could also apply to employees by the Department of Labor in enforcing the FLSA and other federal laws.  This Friday’s Five discusses five issues that could create joint employer liability under California and Federal law.

1. An entity can be held a joint employer if it exercises control over wages, hours, or working conditions.

Under California law, an entity can be held liable under the joint employer theory if it “directly or indirectly, or through an agent or any other person, employs or exercises control” over their wages, hours, or working conditions.  While this standard is potentially broad in scope, courts have limited its reach in holding that entities that may be able to influence treatment of employees but that do not have any actual “authority to directly control their wages, hours or conditions” are not joint employers.  Ochoa v. McDonald’s Corp.  The court in Ochoa explained that the California Court of Appeal in Futrell v. Payday California, Inc. held that “control over wages means that a person or entity has the power or authority to negotiate and set an employee’s rate of pay, and that an entity that does not control the hiring, firing, and day-to-day supervision of workers is not an employer.”

2. An entity can be liable for “suffering or permitting” the work.

The California Supreme Court held in Martinez v. Combs that the “basis of liability is the defendant’s knowledge of and failure to prevent the work from occurring.”  The analysis is whether the entity had power to cause the employee to work or the power to prevent the employee from working.

3. Joint employer liability exists if the employee is “engaged.”

The Court in Martinez held that “to engage” means to create a common law employment relationship.  In terms of the franchisor and franchisee context, the California Supreme Court explained the test is whether the alleged employer “has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.”  Patterson v. Domino’s Pizza.

4. “Ostensible” agency.

Ostensible agency holds a principal liable for acts of the “ostensible agent.”  This liability is created when: (1) the person dealing with the agent must do so with belief in the agent’s authority and this belief must be a reasonable one; (2) such belief must be generated by some act or neglect of the principal sought to be charged; and (3) the third person in relying on the agent’s apparent authority must not be guilty of negligence.  Put another way, “A principal is bound by acts of his agent, under a merely ostensible authority, to those persons only who have in good faith, and without want of ordinary care, incurred a liability or parted with value, upon the faith thereof.”  Cal. Civil Code section 2334.

5. Department of Labor’s Administrative Interpretation issued in 2016.

In January 2016, the DOL issued an Administrative Interpretation regarding how the agency views joint employment liability.  The DOL explains that under the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), “an employee can have two or more employers for the work that he or she is performing. When two or more employers jointly employ an employee, the employee’s hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime pay is due. Additionally, when joint employment exists, all of the joint employers are jointly and severally liable for compliance with the FLSA and MSPA.”  While not necessarily binding on courts, the DOL’s interpretation is instructive of how broadly it views the joint employer test.

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