The Issue:  Could my company be liable as a joint employer for Labor Code violations of our subsidiary or third-party staffing company?

The Solution:  Companies with subsidiaries and staffing companies in California should take steps to limit exposure.

Analysis:  Parent corporations are generally presumed to be separate entities from their subsidiaries, and therefore not liable for the unlawful treatment of their subsidiary’s separate employees unless they exercise significant control over day-to-day operations.  Recent developments, however, call this precedent into question.

In Castaneda v. Ensign, 229 Cal. App. 4th 1015 (2014) (review denied), the California Court of Appeal held:  “an entity that controls the business enterprise may be an employer even if it did not ‘directly hire, fire, or supervise’ the employees.”  (emphasis added).  The parent company at issue claimed a lack of control over wages, hours and working conditions of its subsidiary operating companies’ employees.  In reversing summary judgment for the parent and sending the case to be tried by a jury, the court highlighted evidence that the parent provided centralized human resources, accounting, payroll, and other key services to its subsidiary; controlled the mechanisms used to track subsidiary employees’ hours; handled subsidiary employee discipline, benefits and workers’ compensation claims; required subsidiary compliance with parent policies, practices, templates, forms, and training; and set the pay rate for some subsidiary employees.   

Castaneda also resurfaced recent California Supreme Court precedent that “[m]ultiple entities may be employers where they control different aspects of the employment relationship…This occurs, for example, when one entity (such as a temporary employment agency) hires and pays a worker, and another entity supervises the work…Supervision of the work, in the specific sense of exercising control over how services are performed, is properly viewed as one of the 'working conditions'…control over how services are performed is an important, perhaps even the principal, test for the existence of an employment relationship.”  In other words, the worksite employer who supervises the worker may be liable to workers for Labor Code violations and other alleged wrongs even if it is not the employer of record who issues paychecks.

The California Legislature is not sitting on the sidelines, either.  Effective January 1, 2015, AB 1897 imposed joint employer liability on many companies who engage labor contractors such as staffing agencies that fail to pay required wages to, or secure valid workers compensation insurance for, the workers they supply—regardless of the “control” test discussed above. Likewise, the California Department of Industrial Relations has clarified that California’s new paid sick leave law will apply equally to staffing agencies and their “joint employers.” 

Given this upward trend in joint employer liability, companies with the help of counsel should evaluate their subsidiary and staffing relationships.  Corporate structure—in  name and in operations—should be separate and independent.  Companies who prefer centralized corporate services by the parent company should weigh the risk that efficiency may indicate control over wages, hours, and working conditions.  Careful selection and some oversight of, and indemnity agreements with, labor contractors should be considered.