Insights

Home > News & Insights > Insights > Payroll Company Not “Employer” For Purpose Of Unpaid Overtime Claim Under California Law

Share this on:   a b j c

Payroll Company Not “Employer” For Purpose Of Unpaid Overtime Claim Under California Law

Published by on January 11, 2011

On December 16, 2010, the California Court of Appeal, Second Appellate District, Division Eight, in Futrell et al. v. Payday California, Inc. et al., held that a company that provides payroll processing was not an “employer” for wage claims under the California Labor Code and the Fair Labor Standard Act (FLSA), and therefore, the payroll […]

On December 16, 2010, the California Court of Appeal, Second Appellate District, Division Eight, in Futrell et al. v. Payday California, Inc. et al., held that a company that provides payroll processing was not an “employer” for wage claims under the California Labor Code and the Fair Labor Standard Act (FLSA), and therefore, the payroll company could not be liable for alleged unpaid overtime or consequential fees and fines.  More after the break.

Reactor Films, Inc. (a producer of television commercials) hired “freelance crewmembers” as needed to complete its production activities and did not maintain full-time production employees.  Payday California, Inc. provided payroll processing for Reactor and other companies that produced television commercials.  Plaintiff was hired by Reactor to work on the production of several commercials and had his payroll processed by Payday.  Plaintiff filed an action against Reactor and Payday on behalf of himself and other similarly situated individuals for violation of, among other statues, Labor Code section 510 and 1194 (unpaid overtime); Labor Code section 203 (prompt payment of wages upon termination); Labor Code section 226 (adequacy of paystubs); and 29 U.S.C §§ 206 and 207 (federal minimum wage and overtime pay).  Plaintiff alleged that Reactor and Payday acted as “joint employers” and failed to promptly pay overtime wages and provide adequate paystubs. 

At summary judgment, Payday argued that it was not plaintiff’s “employer” and presented evidence that it did not hire or fire plaintiff or have the authority to do so, did not control his work, did not set or negotiate his wages, did not determine his hours or conditions of employment, and did not entered into a written or oral employment contract with him.  Plaintiff alleged that he understood he was a Payroll employee because he received payroll documents from Payday and Payday employees made statements to that effect.  Plaintiff presented evidence that the timecards, information sheets, eligibility verifications, and tax withholding forms he completed were provided by Payday.  Additionally, paystubs and W-2 forms identified Payday as plaintiff’s “employer of record.” Payday also paid workers’ compensation and unemployment insurance premiums for plaintiff.  The trial court concluded that Payday could not be liable as plaintiff’s “employer” for purposes of his wage claim, and therefore, entered summary judgment in favor of Payday.            

The Court of Appeal affirmed, holding that Payday was not plaintiff’s “employer” based on the definitions of set out under both (a) the California Industrial Welfare Commission (IWC) Wage Order No. 12, as interpreted by Martinez v. Combs, 49 Cal. 4th 35 (2010), and (b) the FLSA. 

Under the California Labor Code, the Court concluded that plaintiff failed to present evidence creating a triable issue of fact that Payday exercised control over plaintiff’s hours or working conditions.  As an issue of first impression, the Court further held that for purposes of the definition of “employer” under California wage claims, to “exercise control over workers’ wages” means “a person or entity that has the power or authority to negotiate and set an employee’s rate of pay, and not that a person or entity is physically involved in the preparation of an employee’s paycheck.”  The Court further held that “[t]he task of preparing payroll, whether done by an internal division or department of an employer, or by an outside vendor of an employer, does not make Payday an employer for purposes of liability for wages under the Labor Code wage statutes.”  The Court noted that this decision was consistent with a number of federal cases which remained analytically sound after Martinez, including Singh v. 7-Eleven, Inc. U.S. Dist. Lexis 16677 (N.D. Cal. March 8, 2007), which held that a parent company’s payroll activities for its franchisee were insufficient to demonstrate an employment relationship between the workers and the parent company for purposes of Labor Code wage statues. 

The Court further concluded that Payday did not meet the other prongs of the Martinez definition of “employer” because (a) it did not cause plaintiff “to suffer or permit to work,” and (b) it did not meet the common law employment test.  Payday could not be considered the common law employer under California law because it did not direct or supervise the production sites, did not provide any tools or equipment, and plaintiff’s work was not for the benefit of Payday or integral to Payday’s regular business operations. 

Applying the economic reality test under the FSLA, the Court concluded that Payday was not plaintiff’s employer for purposes of his federal wage claim because Payday did not exercise control over the plaintiff’s work by simply engaging in payroll activities at the request of Reactor.

Finally, the Court rejected plaintiff’s argument that Payday was estopped from denying its statute as an employer because it represented it was an employer to purchase workers’ compensation insurance.  Plaintiff failed to present any evidence that he detrimentally relied on Payday’s statements as required to establish an estoppel claim.    

 For a copy of the decision, click here.

Topics:

Share:   a b j c