A Parent Corporation May Be Liable for the Nonpayment of Wages by its Subsidiary

Posted on March 3, 2015

By: Alis M. Moon

In Castaneda v. Ensign Group, Inc., (2014) 229 Cal.App.4th 1015, plaintiff, a former employee of Cabrillo Rehabilitation and Care Center ("Cabrillo"), filed a class action against Cabrillo's parent company, The Ensign Group, Inc. ("Ensign") for nonpayment of minimum wages and overtime wages.

The employee alleged that the parent corporation was his employer because: (1) it owned and controlled Cabrillo; and (2) it controlled the training, supervision, work requirements, work condition and employee benefits for the employees who worked at Cabrillo.

In deciding whether Ensign could be liable as a joint employer, the Court of Appeal pointed out that an entity that controls a business enterprise may be an "employer" even if it did not "directly hire, fire or supervise" the employees. Multiple entities may be considered employers where they "control different aspects of the employment relation." For example, when an entity such as a temporary employment agency hire and pays an employee, while an entirely different entity supervises the employee's work, both entities can be considered that employee's "employer."

Ensign argued that it was not plaintiff's employer as it is purely a holding company that has no employees and is not engaged in the direction, management or control of Cabrillo or its employees. Ensign even introduced a written agreement entered into with Cabrillo, stating that Cabrillo's employees were its "own" employees.

Plaintiff, on the other hand, argued that Ensign did in fact exercise control over Cabrillo's operations and employees. It was undisputed that Ensign owned all of Cabrillo's stock. Plaintiff introduced evidence showing that Ensign exercised control over Cabrillo's workplace policies, and provided equipment and computer systems, including employee timekeeping systems for Cabrillo. All of Cabrillo's new hires were shown Ensign "policy and training videos," Ensign had the ability to discipline Cabrillo's employees, and Ensign handled the traditional employee benefits including medical, dental, vision, and 401(k) savings plans for all of Cabrillo's employees.

After weighing the evidence, the Court of Appeal concluded that a trier of fact could reasonably infer that Ensign was plaintiff's employer. Thus, even though Ensign was merely a corporate parent with no employees, it could nevertheless be liable for its subsidiary's failure to pay overtime and minimum wages under the joint employer theory.

This case emphasizes the need for companies to be cautious in maintaining separate, distinct and independent corporate structures in order to avoid joint employer liability.

Alis Moon is an Associate with Kring & Chung, LLP's Irvine, CA office. She can be reached at (949) 261-7700 or amoon@kringandchung.com.