Articles from May 2018

On November 29, 2017, the California Court of Appeal, Fourth District, addressed when the corporate veil can be pierced for wage-and-hour violations. Turman, et al. v. Superior Court of Orange County, No. G051871 (4th Dist. Div. 3 Nov. 7, 2017) (slip op. available here). The plaintiffs sued their former employer, Koji’s Japan, Inc. (“Koji’s”), along with A.J. Parent Company, Inc. a.k.a. “America’s Printer,” and Arthur Parent, who was the president, sole shareholder, and director of Koji’s and America’s Printer, in a class and collective action lawsuit. Among other rulings, the former restaurant employees appealed the trial court’s decision that Mr. Parent and America’s Printer were not alter egos of Koji, and that Mr. Parent was not liable as a joint employer for their state labor law claims.

The Turman plaintiffs initiated the underlying lawsuit in 2010 against Koji’s and Mr. Parent (as an individual). Each plaintiff was employed by the Koji’s entity and worked at one or both of its restaurants at some point between 2006 until early 2012, when Mr. Parent closed the restaurants. In 2012, the plaintiffs filed their third amended complaint against Koji’s and Mr. Parent, and added America’s Printer as a defendant.

In 2010, in Martinez v. Combs, 49 Cal.4th 35 (2010), the California Supreme Court set forth three alternative definitions of “employer” derived from the Industrial Wage Commission’s (IWC) Wage Orders that apply to wage-and-hour actions: to employ is to “(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, 49 Cal.4th at 64. In Turman, the plaintiffs argued that under Martinez, Mr. Parent was a joint employer because he exercised significant control over Koji’s restaurant employees, including hiring and firing non-exempt managers, instructing his managers to fire one of the plaintiffs who initiated the lawsuit, and laying off all employees when he closed the restaurants. The trial court was concerned that, under this argument, all owners of closely-held corporations would be liable as joint employers because of their ultimate control of their businesses. Thus, rather than following Martinez (by distinguishing it as applicable to corporate joint employers), the trial court turned to the common law rule that corporate agents acting within the scope of their agency are not personally liable for a corporate employer’s failure to pay its employees.

In late 2017, the Court of Appeal held that the trial court should have followed Martinez, and therefore the IWC Wage Orders, as controlling authority for defining an employer because, “[w]ere we to define employment exclusively according to the common law in civil actions for unpaid wages[,] we would render the commission’s definitions effectively meaningless.” Slip op. at 27 (quoting Martinez, 49 Cal.4th at 65). Turning to the facts of the underlying case, this court noted that, per the trial court’s statement of decision, Mr. Parent was not a remote shareholder, but was the “big boss” who “had the ability to control [Koji’s and America’s Printer], whether he chose to delegate that responsibility or not.” Slip op. at 28. Thus, the appellate court directed the trial court to reconsider the issue of Mr. Parent’s joint liability by applying the three possible definitions of an employer from Martinez. Under this analysis, owners of closely-held corporations are not presumed to be immune from personal liability as corporate agents, but instead, courts will look to their activities with employees and/or business operations.

Additionally, the trial court had found that the plaintiffs did not prove that “failure to disregard the corporate entity would sanction a fraud or an injustice,” citing that Koji’s was a real business that was not “formed for the purpose to commit fraud or other misdeeds.” Slip op. at 22. The Court of Appeal held this was a misapplication of California law, which states there are only two requirements that must be met to invoke the alter ego doctrine: “a unity of interest and ownership between the corporation and its equitable owner [such] that the separate personalities of the corporation and the shareholder do not in reality exist; and . . . an inequitable result if the acts in question are treated as those of the corporation alone.” Slip op. at 21 (emphasis in original; quoting Sonora Diamond Corp v. Superior Court, 83 Cal.App.4th 523, 538 (2000)). Thus, the question is not whether the corporate entity was formed for a fraudulent purpose, but whether removing the entity from the equation would lead to an inequitable result. As with the joint-employer analysis, this alter ego analysis can be helpful for potential employee-plaintiffs because under this formulation, courts must look at the facts at hand instead of the more detached incorporation process.

Authored by:
Anthony Castillo, Associate
CAPSTONE LAW APC