Employer: definition of employer

STATE OF CALIFORNIAORAY DAVIS, Governor
DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
LEGAL SECTION
455 Golden Gate Avenue, 8th Floor
San Francisco, CA 94102
(415) 703-4863

miles E. locker, Attorney for the Commissioner

                                      June 18, 2002

The Honorable Judge John M. Watson
Orange County Superior Court, Department 15
700 Civic Center Drive West
Santa Ana, CA 92701

Henry P. Friesen, Esq. FAXED: (949)461-0922
7545 Irvine Center Drive, Suite 200
Irvine, CA 92618
(Attorney for Defendant Donald S. Feuer)

Joseph M. Galosic, Esq. FAXED: (949)580-0903
2663 Towne Centre Drive, Suite 300
Foothill Ranch, CA 92610
(Attorney for Plaintiff Barry Vincent Lyou)

 Re: Grounds for Imposition of Individual Liability for Unpaid
 Wages and Penalties Against Corporate Officer ---
      Barry Vincent Lyou v. Centrecom, Inc., and Donald S. Feuer,

an individual; jointly and severally (State Case No. 18-15109)

  This in response to the joint written request from the above-named

counsel, dated March 14, 2002, asking the Labor Commissioner's hearing
officer to clarify certain matters relating to the order, decision or award
("ODA") that was issued on December 11, 2001 in connection with the above­
referenced unpaid wage claim. Seeking assistance in framing the issues on
the appeal of this ODA, the letter asks: 1) whether the hearing officer
intended to direct the award against Centrecom, Inc., and Donald Feuer,
jointly and severally; 2) whether the hearing officer intended to include
Donald Feuer as a responsible party; and 3) whether the hearing officer
made any findings as to the basis of Donald Feuer's liability. Of course,
the filing of what we assume to have been a timely de novo appeal under
Labor Code §98.2 vacates the Labor Commissioner's order, decision and award
and vests jurisdiction in the superior court to hear and decide the claim.
Pressler v. Donald L. Bren Co. (1982) 32 Cal.3d 831. In the de novo trial
court proceedings, "review is accorded not to the decision of the
commissioner, but to the underlying facts on which depend the merits of the
dispute." Sales Dimensions v. Superior Court (1979) 90 Cal.App.3d 757,763.
However, in order to provide the court and the parties with the best
assistance possible, we will endeavor to answer the questions that have
been posed by setting out the legal principles which the hearing officer
would have applied in resolving issues of individual liability for unpaid
wages when the claimant was employed by a corporation.

  The ODA that was signed by the hearing officer named as the defendant

both Centrecom, Inc., a Nevada corporation, and Donald S. Feuer, an
individual, "jointly and severally." On its face, the ODA makes both the
corporation and the individual liable for $34,864.68 in unpaid wages,
interest on those unpaid wages pursuant to Labor Code §98.1, plus penalties
pursuant to Labor Code §203 in the amount of $9,230.70. The ODA sets out
fairly detailed findings of fact as to the manner in which the unpaid wage
claim arose -- the employer's cash flow problems led to the creation of an
agreement that was apparently signed by the plaintiff and Donald Feuer,
under which payment of wages owed to the plaintiff was deferred in order to
allow for the use of those amounts to operate the business, in the hope
that this would give the business time to obtain the funding needed to
continue to function. When the hoped for funding failed to materialize,
Donald Feuer informed the plaintiff that he would not be paid his deferred
wages, and plaintiff's employment came to an end without the deferred wages
having been paid. Unfortunately, the ODA does not specifically identify
the facts, or the legal principles upon which the hearing officer relied in
deciding that Donald Feuer is jointly and severally liable for the amounts
owed, and it does not appear that the hearing officer made any findings in
the ODA as to the basis of Donald Feuer's liability. We apologize for this
oversight, and note that a copy of this letter will be sent to all Labor
Commissioner hearing officers to remind them of the need to include such
findings in the ODA as to any defendant against whom a claim has been made.
(See, Government Code §11425.50(a), which provides that the decision of a
hearing officer in an administrative adjudicatory hearing "shall be in
writing and shall include a statement of the factual and legal basis for
the decision.")

 Nonetheless, in view of the above-cited judicial precedents on the

scope of de novo review under Labor Code §98.2, the facts that the parties
present to the court in these proceedings are the facts that will determine
whether any unpaid wages and penalties are owed and if so, whether Donald
Feuer is liable for those amounts. These facts must, of course be assessed
against the backdrop of existing law on the subject of the liability of
corporate officers or managers for unpaid wages. We start with the basic
premise that all earned and unpaid wages must be paid promptly upon an
employee's separation from employment -- either immediately upon a
discharge (Labor Code §201) or within 72 hours of a voluntary quit without
prior notice (Labor Code §202). The obligation to pay these wages is an
obligation that rests with the employer. But just who is the "employer"
for the purpose of the laws dealing with payment of wages? The only
definition of the term employer, for this purpose, is found not in the
Labor Code, but rather, in the various orders of the Industrial Welfare
Commission ("IWC") which govern the payment of wages, hours of work, and
working conditions of employees in every industry and occupation in
California.

 The IWC is "the state agency empowered to formulate regulations (known

as wage orders) governing employment in the State of California. (Labor
Code § 1173, 1178.5, 1182.)" Tidewater Marine Western v. Bradshaw (1996) 14
Cal.4th 557, 561. As the Supreme Court has explained: "In article XIV,
section 1 of the California Constitution, the people have given the
Legislature broad power in this area: 'The Legislature may provide for
minimum wages and for the general welfare of employees and for those
purposes may confer on a commission legislative, executive, and judicial
powers.' . . . . In Labor Code sections 1173 and 1178 and following, the
Legislature in turn has delegated its power in this regard to the
Commission." Henning v. IWC (1988) 46 Cal.3d 1262, 1277 (italics omitted.)

Wage orders are quasi-legislative. "Quasi-legislative regulations are
those 'adopted by an agency to which the Legislature has conferred the
power to make law' and such rules 'have the dignity of statutes' [citation
omitted]." Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 800.

 Every one of the IWC's industry-wide and occupational wage orders

expressly defines an "employer" as "any person as defined in Section 18 of
the Labor Code (which defines "person" to include "any person,
association, organization, partnership, business trust, limited liability
company, or corporation"), who directly or indirectly, or through an agent
or any other person, employs or exercises control over the wages, hours or
working conditions of any person." (Emphasis added. See, e.g., IWC Order
4-2001 [8 CCR §11040], subdivision 2(H).) Under the second of these two
independent prongs, all that is needed to come within the definition of
"employer" is the exercise of control over wages, hours or working
conditions. This second prong has been construed in only one published
decision, Bureerong v. Uvawas (C.D. Cal. 1996) 922 F.Supp. 1450, in which
the court held that this definition of "employer" allows for the imposition
of liability for unpaid wages against officers of a corporation who
exercise the requisite control over employees' wages, or hours, or working
conditions. The court's rationale is instructive:

 The terms "employer," "employee," and "employ" are not
 specifically defined in the Wages, Hours, and Working Conditions
 sections of the California Labor Code. See §§Cal.Labor Code
 1171-1205.  In addition, no reported California decisions have
 directly addressed the issue. However, as with the federal FLSA,
 the California law governing wages is remedial in nature and must
 be "liberally construed."   See California Grape & Tree Fruit
 League v. Industrial Welfare Commission, 268 Cal.App.2d 692, 698,
 74 Cal.Rptr. 313 (1969). . . . The wage statutes "are not
 construed within narrow limits of the letter of the law, but
 rather are to be given liberal effect to promote the general
 object sought to be accomplished." [Ibid.]

Thus, in determining the applicability of the minimum wage and
overtime provisions of the California Labor Code, the Court must
look to the fundamental remedial purposes behind the laws. Given
this duty, the Court finds that the California courts would
likely adopt the federal FLSA's broad definition of "employment."
The California courts would likely focus on the "economic
realities" of the relationship, rather than on mere contractual
or technical distinctions.

The Court reaches this conclusion for three main reasons. First,
it is evident that the federal and state minimum wage and
overtime provisions are analogous and complementary.
Accordingly, federal authorities defining the concept of
employment (see discussion above) are extremely persuasive to the
Court in its determination of the California definition.
Second, in its Order Regulating Wages, Hours, and Working
Conditions in the Manufacturing Industry, the California
Industrial Welfare Commission defines the terms "employ,"
"employee," and "employer" extremely broadly, and in terms almost
identical to §29 U.S.C. 203(g) ("employ"), § 203(e)
("employee"), and § 203(d) ("employer"). See Industrial Welfare
Commission Order 1-89, 8 California Regul.Code § 11010 ("IWC Wage
Order"). The IWC Wage Order states that the verb "employ" "means
to suffer, or permit to work." Compare §29 U.S.C. 203(g) ("
'employ' includes to suffer or permit to work"). The IWC Wage
Order states that an "employee" is "any person employed by an
employer." Compare §29 U.S.C. 203(e) ("the term 'employee'
means any individual employed by an employer"). Finally, the IWC
Wage Order states that an "employer" is "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 any person." Compare §29 U.S.C. 203(d)
("'Employer' includes any person acting directly or indirectly
in the interest of an employer in relation to an employee").
Thus, the IWC has adopted the federal FLSA's definitions of these
terms.

Third, the California Supreme Court has construed a related
remedial statute to contain an extremely broad definition of
"employer." In S.G. Borello & Sons v. Department of Industrial
Relations, 48 Cal.3d 341, 256 Cal.Rptr. 543, 769 P.2d 399 (1989),
the California Supreme Court construed the Worker's Compensation
Act's definition of "employment" to be "not inherently limited by
common law principles." Id. at 352, 256 Cal.Rptr. 543, 769 P.2d
399. Mindful of the "history and fundamental purposes" of the
statute, the Court found that in determining whether "employment"
existed, a court must consider "[t]he nature of the work, and the
overall arrangement between the parties," and not technical or
contractual distinctions. Id. at 353, 256 Cal.Rptr. 543, 769
P.2d 399. The Court stated that "[e]ach service arrangement must
be evaluated on its facts, and the dispositive circumstances may
vary from case to case." Id. at 354, 256 Cal.Rptr. 543, 769 P.2d
399. Moreover, in reaching this conclusion, the California
Supreme Court cited with approval the various United States
Supreme Court cases defining "employment" in the context of the
FLSA. Id. at 352, 256 Cal.Rptr. 543, 769 P.2d 399.

For these reasons, and in light of the general remedial purposes of the
prevailing wage statutes, the federal district court held that under
California wage and hour law, the term "employer" should be broadly
construed, so as to permit corporate officers who exercise sufficient
control over employees to be subject to liability for these employees'
unpaid wages. Bureerong v. Uvawas, supra, 922 F.Supp. 1450, 1469-1470.

  Federal cases construing these analogous provisions of the federal

Fair Labor Standards Act ("FLSA") provide further persuasive guidance. See
Aguilar v. Association of Retarded Citizens (1991) 234 Cal.App.3d 21
[federal interpretations of federal labor laws may provide persuasive
authority for interpreting similar provisions of state law.] Numerous
federal cases have imposed liability under the FLSA against corporate
officers or managers for unpaid wages and liquidated damages owed to the
corporation's employees. To be held liable under the FLSA, a person must
be an "employer," which §3(d) of the Act defines broadly as "any person
acting directly or indirectly in the interest of an employer in relation to
an employee." 29 USC §203(d). The Supreme Court has emphasized the
"expansiveness" of the FLSA's definition of "employer." Falk v. Brennan
(1973) 414 U.S. 190, 195, 94 S.Ct. 427. More recently, in Herman v. RSR
Security Services, Ltd. (2nd Cir. 1999) 172 F.3d 132, 139, the court
explained that "the overarching concern is whether the alleged employer
possessed the power to control the workers in question . . . with an eye to
the 'economic reality' presented by the facts of each case." The Court
explained:

 Under the 'economic reality' test, the relevant factors include
 'whether the alleged employer (1) had the power to hire and fire
 the employees, (2) supervised and controlled employee work
 schedules or conditions of employment, (3) determined the rate
 and method of payment, and (4) maintained employment records.'
 [cites omitted.]

 No one of the four factors standing alone is dispositive. [cite
 omitted.]  Instead, the 'economic reality' test encompasses the
 totality of the circumstances, none of which is exclusive. Since
 economic reality is determined based upon all the circumstances,
 any relevant evidence may be examined so as to avoid having the
 test confined to a narrow legalistic definition. . . . (Ibid.)

 Federal cases finding individual liability for wages owed to a

corporation's employees on the basis of this broad definition of "employer"
are not a new development. See, e.g., Donovan v. Agnew (1st Cir. 1983) 712
F.2d 1509, 1511 [employer includes person who has "operational control" of
the day to day functions of the business]; Donovan v. Sabine Irrigation Co.
(5th Cir. 1983) 695 F.2d 190, 194-195 [employer includes person who
"effectively dominates its administration or otherwise acts, or has the
power to act, on behalf of the corporation vis-a-vis its employees." Also,
stock ownership is not necessary to a finding of employer status -- the
focus of the test is control; not ownership.]

 In another case in which a corporation's president was found liable

for the corporation's FLSA obligations, the district court in Lopez v.
Silverman (S.D. N.Y. 1998) 14 F.Supp.2d 405, 412, explained, "Numerous
Courts of Appeal have concluded that an individual corporate officer or
owner may be deemed an employer under the FLSA -- and therefore responsible
for the corporation's FLSA obligations -- in situations where the
individual has overall operational control of the corporation, possesses an
ownership interest in it, controls significant functions of the business,
or determines the employees' salaries and makes hiring decisions. See,
e.g., United States Dep't Labor v. Cole Enters., Inc., 62 F.3d 775, 778
(6th Cir 1995) [other cites omitted.]"

 Again, it is control -- not stock ownership -- that is the critical

factor. In Reich v Circle C. Investments, Inc. (5th Cir. 1993) 998 F.2d
324, 329, the court held that a "consultant" providing services to a
corporation that owned and operated an exotic dance club, who held no
ownership interest in the corporation, was not an officer of the
corporation and did not exercise control over the most of the corporation's
day-to-day operations, nonetheless came within the definition of an
"employer" under the FLSA so as to be liable for unpaid wages owed to the
corporation's dancers because he "exercised control over the work
situation." Specifically, this individual hired some of the dancers,
acted as their supervisor and gave them specific instructions as to how to
perform their work, signed their paychecks, and imposed or threatened to
discipline the dancers for violating certain work rules.

 As recognized in Bureerong, these FLSA cases tell us exactly how the

"control prong" of the state law definition of "employer" for wage and hour
purposes ought to be construed. To be sure, not every employment law
provides for the same broad definition of "employer" as that found under
the FLSA and California's IWC orders. And other laws, which may have a
much narrower definition of "employer," should not be used as guidance in
construing the term under the IWC orders. For example, in Reno v. Baird
(1998) 18 Cal.4th 640, the California Supreme Court held that there is no
individual liability for certain discriminatory employment practices under
the Fair Employment and Housing Act ("FEHA"). Two of the factors upon
which the Supreme Court premised its holding in Reno show precisely why
that decision is inapposite to the issue of the definition of "employer,"
and the scope of individual liability under wage and hour law. First, the
Reno court held that holding supervisors personally liable for
discrimination was incongruent with the small employer exemption. (Id. at
662) Under the IWC orders and California's wage and hour laws, no such
incongruity exists; there is no small employer exemption, instead, all
employers -- individuals and corporations regardless of the number of
employees employed -- must abide by the wage orders and laws governing
payment of wages. Second, the Reno court stated that "in interpreting
FEHA, California courts have adopted the methods and principles developed
by federal courts in employment discrimination claims arising under [the
federal acts]. The general rule applies to the issue in this case." (Id.
at 659.) Here, the analogous federal act, the FLSA, makes corporate
officers and managers who exercise the requisite control personally liable
for non-payment of wages.

 The Labor Commissioner hearing officer's decision finding Donald Feuer

liable for the wages and penalties owed to the plaintiff was founded upon
these general principles of California wage and hour law. We trust that
whatever facts may be presented to the trial court in the pending de novo
proceedings, these same legal principles will determine whether or not
individual liability exists. We thank the parties, and the court, for
affording us this opportunity to better explain the basis for our decision
below.

                           Sincerely,




                           Miles E. Locker
                           Attorney for the Labor Commissioner

cc: Arthur Lujan, Labor Commissioner
Anne Stevason
Tom Grogan
Greg Rupp
Nance Steffen
Doug McConkie, IWC