Employment Law Alert: Holding Companies May Qualify as Employers

In Castaneda v. The Ensign Group, Inc. (No. B249119, filed 8/7/14), the California Court of Appeal for the Second Appellate District held that if a corporation with no employees “exercises some control” over another corporation it owns and which has employees, that holding corporation may also be considered the employer of those employees.

In Castaneda, the plaintiff employee filed a state-wide class action lawsuit on behalf of certified nursing assistants to recover unpaid minimum and overtime wages. Rather than file suit against the nursing facility where he worked (“Cabrillo”), the plaintiff named the facility’s holding companies, The Ensign Group, Inc., and Ensign Facility Services, Inc. (“Ensign”), as defendants. The plaintiff argued Ensign was the alter ego of Cabrillo and the corporate veil should be pierced to allow recovery. The trial court disagreed and granted summary judgment in favor of Ensign.

On appeal, the Castaneda court reversed, holding triable issues of fact existed regarding Ensign’s status as the plaintiff’s employer. In reaching its decision, the Castaneda court looked to the broad definition of an employer in Martinez v. Combs (2010) 49 Cal.4th 35, 64, which is “any person . . . who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of [an employee].” It explained that an employer also includes “[a] proprietor who knows that persons are working in his or her business without having been formally hired, or while being paid less than the minimum wage, clearly suffers or permits that work by failing to prevent it, while having the power to do so.”

The Court distinguished the relationship between employees and purchasing companies at issue in Martinez, noting Ensign had more than a mere contractual relationship with Cabrillo. Instead, it was the sole shareholder of Cabrillo’s stock and significant overlap of corporate officers and directors existed. Although Ensign argued it had no employees, the plaintiff presented evidence Ensign exercised control over both Cabrillo’s operations and its employees, including human resources and payroll services, as well as employee discipline. The Castaneda court reiterated that “[c]ontrol over how services are performed is an important, perhaps the principal, test for the existence of an employment relationship.” The court declined to decide the issue of whether the integrated enterprise test developed by federal courts applied to California employment cases because it based its decision exclusively on California law.

The decision in Castaneda serves as a reminder that corporate labels do not control. Rather, actual conduct and control determines the existence of an employer/employee relationship.

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September 17, 2014