Parent Corporation May Meet Definition of Employer Under California Labor Code Where Evidence Shows Control Over Subsidiary’s Employees

In Castaneda v. The Ensign Group, Inc., et al (September 15, 2014) — Cal.App.4th —), the California Second District Court of Appeal considered whether, if a parent corporation with no employees owns and exercises control over a subsidiary corporation, the parent corporation may be an employer of the employees of the corporation it owns.  The Second District Court of Appeal held a triable issue of fact existed as to whether the parent corporation was an employer.

Background

John Castaneda (“Castaneda”) filed a class action lawsuit against the Ensign Group, Inc. (“Ensign”) for unpaid wages and overtime, alleging Ensign was the alter ego of the nursing facility where he worked, the Cabrillo Rehabilitation and Care Center (“Cabrillo”).  

Ensign filed a summary judgment motion, alleging Cabrillo, not Ensign, was Castaneda’s employer.   Ensign argued it was a “holding company” with no employees while Cabrillo was an independent corporation with its own traditional management structure.  Ensign alleged further that it was not engaged in the direction, management or control of Cabrillo and/or Cabrillo’s employees.  However, Ensign admitted that it owned Cabrillo and all of its stock.

Castaneda opposed summary judgment and alleged Ensign owned and controlled Cabrillo, noting that Ensign controlled the training, supervision, work requirements, working conditions and employee benefits for the employees who worked there. 

The trial court granted Ensign’s motion for summary judgment.

Decision

At the outset, the Second District Court of Appeal analyzed three alternative definitions of “employer,” namely “…(a) to exercise control over the wages, hours, or working conditions, or (b) to suffer or permit to work,  or (c) to engage, thereby creating a common law employment relationship.”  (Martinez v. Combs (2010) 49 Cal.4th 35, 64.)  (See KMTG Legal Alert for a discussion of the Martinez case.) The Court cited case law holding a business enterprise could be an employer even if it did not directly hire, fire or supervise the employees and that multiple entities could be considered employers if they exercised control.  The Court stated control over how the services are performed is an “important, perhaps even the principal” test for the existence of an employment relationship.

Pursuant to these definitions of employer, the Court determined a triable issue of fact existed as to whether Ensign was the employer of the individuals, including Castaneda, who worked at Cabrillo.  The Court considered a variety of evidence in determining that a triable issue of fact existed, including evidence that (1) Ensign owned Cabrillo, (2) Ensign had exercised control over Cabrillo’s operations and employees, (3) Ensign recruited employees for Cabrillo, (4) Cabrillo’s management reported to another company owned by Ensign, (5) Ensign acknowledged its centralized control over Cabrillo, (6) a “seamless flow” of executives existed between Cabrillo and Ensign, (7) employee paychecks were issued from Ensign, (8) signs posted at the Cabrillo facility stated “Ensign Group,” (9) employee benefits for Cabrillo employees were managed by Ensign, (10) Ensign handled employee discipline for Cabrillo employees, and (11) Ensign supervised and controlled Cabrillo employees’ job functions.

The decision emphasizes that even where a corporation exists separate and apart from other corporations it owns, it could potentially be held liable as an employer if it exercises a certain level of control over its subsidiary corporations’ employees.

Questions

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Meredith Packer Garey | 916.321.4500