After nearly four years, the California Supreme Court has finally issued a unanimous decision in Martinez v. Combs, finding that officers and directors of a corporate employer cannot be held civilly liable for causing the corporation to violate the statutory duty to pay minimum wages where the individual corporate agents acted within the scope of the agency.

The plaintiffs in Combs worked as seasonal agricultural workers for Munoz & Sons (Munoz). Munoz grew and harvested strawberries in the Santa Maria Valley and employed the plaintiffs during the 2000 strawberry season. Munoz, with the assistance of its foremen, hired and fired its employees, trained them, supervised them, “told them when and where to report to work, when to start, stop and take breaks, provided their tools and equipment, set their wages, paid them, handled their payroll and taxes, and purchased workers’ compensation insurance.”

Apio, Inc. (Apio) and Combs Distribution Co. (Combs) were produce merchants who contracted with Munoz for the purchase of fresh strawberries. Corky and Larry Combs were principals in Combs and Juan Ruiz was Combs’ field representative who inspected the quality of the available strawberries and explained the manner in which the strawberries were packed. Munoz filed and was later granted a discharge in bankruptcy. Therefore, the plaintiffs sought to recover unpaid minimum wages under Labor Code section 1194 against Apio, Combs, its principals and Ruiz.

To do so, plaintiffs argued that the Industrial Welfare Commission's (IWC) Wage Order No. 14-2001 (Wage Order 14) defined each of the defendants (Munoz, Combs, Apio) as employers for purposes of section 1194. The lower courts rejected this argument and the California Supreme Court affirmed.

Before the California Supreme Court, the plaintiffs claimed that pursuant to the IWC, each of the remaining entity defendants (Combs and Apio) “suffer[ed], or permit[ted plaintiffs] to work” because they knew Munoz would need to hire workers to fulfill its contracts with Apio and Combs for their respective benefit. The plaintiffs further argued that the defendants exercised control over the plaintiffs’ wages, hours and/or working conditions as defined by Wage Order 14. Specifically, the plaintiffs contended that the defendants controlled payment of Munoz's share of sales proceeds pursuant to their purchase agreements with Munoz and, therefore, a portion of the income from which Munoz paid his employees.

The defendants argued that Reynolds v. Bement, 36 Cal. 4th 1075 (2005) controlled the issue. In Reynolds, the court held that directors and officers of a corporation are not liable for the corporation’s employees’ unpaid overtime compensation. Alternatively, the defendants requested that the court construe the wage order as if it incorporated the “economic reality” definition developed under the federal Fair Labor Standards Act (FLSA).

After a lengthy analysis of the legislative history and intent behind the creation of the IWC, the court ruled that (1) the scope of the IWC's delegated authority extends to wages, hours and working conditions, (2) the IWC's definition of “employer” could include situations in which multiple entities control different aspects of the employment relationship, and (3) the definition of “employer” was intended to distinguish state wage law from federal law.

The court rejected each of the plaintiffs’ arguments and found that for a business proprietor (such as Apio or Combs) to “suffer or permit” work under the IWC and section 1194, the proprietor must (1) know that persons are working within the “business without being formally hired or while being paid less than the minimum wage . . . [and (2)] fail[] to prevent it, (3) while having the power to do so.”

The court dismissed the theory that a business relationship was sufficient to transform the downstream beneficiary (the purchaser in this case) into an employer under section 1194. The court concluded that the business entity must have the power to prevent the work from occurring and the “specific sense of exercising control over how services are performed” to be considered an employer under section 1194. Accordingly, the court affirmed the appellate court’s ruling that defendants Apio, Combs and Ruiz did not employ or have an employment relationship with the plaintiffs.

This entry was written by Heather Davis and Lauren Howard.