Can a corporate parent with no employees that exercises some control over a corporation with employees, be the employer of the employees of its wholly-owned subsidiary? According to a recent California Court of Appeal decision, the answer is yes.
Are you my employer?
John Castaneda was a certified nursing assistant at Cabrillo Rehabilitation and Care Center in San Luis Obispo County. He filed a wage and hour class action against Cabrillo’s parent holding company, The Ensign Group, Inc., alleging minimum wage and overtime wage violations. The lawsuit alleged that Ensign was the alter ego of Cabrillo and therefore was also his employer.
Ensign claimed it was merely a holding company with no employees, while Cabrillo was an independent operation with its own employees; and that Ensign lacked control and responsibility over Cabrillo’s employees. Ensign asked the court to find Cabrillo was the plaintiff’s only employer and to dismiss Ensign from the lawsuit. The trial court granted summary judgment in favor of Ensign Facility Services, Inc., one of the companies in Ensign’s portfolio. Castaneda appealed that decision.
The court of appeal first analyzed who can be deemed an employer under California law. The broad definition of “employer” includes “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 also quoted from the California Supreme Court’s decision in Martinez v. Combs and stated that an employer is one “who employs or exercises control over the wages, hours, or working conditions” of an individual. Further, multiple entities may be employers where they “control different aspects of the employment relationship,” and an entity that controls another may be an employer even if it did not “’directly hire, fire or supervise’ the employees.”
While reversing summary judgment in favor of Ensign, the court found that Ensign had more than just a mere contractual relationship with Cabrillo because evidence showed that it had “structural and management control” over Cabrillo. Specifically, Castaneda submitted evidence that Ensign owned a “cluster” of companies that exercised control over Cabrillo’s operations. Castaneda also presented evidence that Ensign controlled the recruiting and interviewing, training, supervision, work requirements and working conditions (including meting out employee discipline) of Cabrillo employees.
Furthermore, employees of Cabrillo have to follow “Ensign core values”; use Ensign’s forms and templates; use time clock programs used by all Ensign entities and follow Ensign’s policy requiring a fingerprint for clocking in and out. There was also evidence that Cabrillo employees received their paychecks from “Ensign Facility Services, Inc.,” accessed employee benefits information through Ensign departments; were given “@ensigngroup.net” email addresses and received employee handbooks provided by Ensign.
Taking all of this information together, the court ruled that a judge or jury could reasonably infer that Ensign was actually the employer and could be held liable for damages owed to members of the class action. Citing Martinez v. Combs, the court explained that “the basis for liability is the owner’s failure to perform the duty of seeing to it that the prohibited condition does not exist.”
This case underscores the challenges inherent in insulating a parent company from being regarded as the alter ego and employer of a related company. Parent companies that want to be protected from being regarded as the employer should consider maintaining separate HR policies and procedures and payroll departments. If that is not feasible, then it’s incumbent on corporate parents that are involved in their subsidiary’s operations to be vigilant in ensuring that their subsidiary’s employment policies and practices are compliant with wage and hour and other employment laws. Consult with experienced employment law counsel to make sure your business is organized and managed to limit exposure to liability.
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