Who is A "Joint Employer" in California -- Martinez v. Combs

In Martinez v. Combs, the California Supreme Court has provided long overdue guidance on the question of who may be held liable for unpaid wages as a "joint employer."  

A large part of the decision is an historical treatise tracing the development of California wage regulation since the Progressive Era.  But the "take-away" rules are the following:

  • The Industrial Welfare Commission ("IWC") has the authority to define who is a covered "employer" through its Wage Orders.
  • The California definition of "employer" does not impose liability on "individual corporate agents acting within the course and scope of their agency." 
  • California law also does not incorporate the extremely broad "economic realities" definition of employer used under the federal FLSA.
  • Rather, the California definition of employer includes only entities which have the practical ability to prevent the alleged violations -- in other words, those parties with the power to "hire and fire," "set wages," or to tell workers "when and where to report to work." 
  • The true employer may not shield itself from liability by exercising this level of control through a "straw man" or by using some other "sham arrangement." 

 The main beneficiaries of the new standards are companies that purchase personal services or labor-intensive products from outside contractors.  So long as the purchasing company is not directly supervising the workers or making hiring and firing decisions it should not face liability for unpaid wages.

U.S. Supreme Court Class Arbitration Ruling Creates Tension With California Law -- Stolt-Nielsen v. Animal Feeds Int'l Corp.

As we have previously posted, over the past few years arbitrators following U.S. and California Supreme Court precedent have consistently found that "silent" arbitration agreements must be interpreted to allow class-wide arbitrations.   

The recent U.S. Supreme Court opinion in Stolt-Nielsen v. Animal Feeds , however, holds that arbitrators may not conduct a class-wide arbitration where the parties' agreement fails to address the issue at all.  As the Court succinctly stated: "[A] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."

Many employers and other defendants will be tempted to read this opinion as creating a new panacea against class actions.  In California, however, this interpretation is probably wrong.   

The reason is the California Supreme Court's holding Gentry v. Superior Court , which created a state law rule that any arbitration agreement that precludes class certification is an unenforceable "exculpatory clause."  Gentry explained that this state law rule creates no conflict with the Federal Arbitration Act ("FAA") because it applies generally to all class-waiver "exculpatory clauses" regardless of whether they happen to appear in arbitration agreements. 

Furthermore, Stolt-Nielsen merely holds that, without an express agreement by the parties, class arbitrations cannot be ordered "under the FAA."   The opinion does not hold, however, that the FAA preempts California courts from compelling class-wide arbitration under state law, such as the California Arbitration Act or the anti-exculpatory rule announced in Gentry.    

In short, defendants will inevitably argue that Stolt-Nielsen bars class certification -- whether in court or arbitration -- if an arbitration agreement does not expressly consent to it.  But California courts are still presumably bound by Gentry to reject this argument as a back-door attempt to enforce an exculpatory class-waiver clause.  Defendants thus may be forced to choose between class-wide arbitration or class-wide litigation.  But under Gentry it is too much to avoid both.