California Decisions

Two significant decisions involving the PEO industry have been decided this month by judges in California. In the first decision, a state court judge dismissed a Florida based PEO from a criminal matter in which the PEO had been charged with a criminal violation involving the death of a worksite employee who had fallen off a roof on which he was working. In a well-reasoned decision the judge issued a twenty-four page decision, which is a highly unusual occurrence in a criminal matter, finding that the PEO was not criminally liable. The judge stated that a judge cannot dismiss a case upon a motion to dismiss if there is “some rational ground for assuming the possibility that an offense has been committed and the accused is guilty of it.” Despite this fact, the judge dismissed the case as no finding of guilt could be attributed to the PEO without a finding that the PEO was “an employer” as that term is used in the California Labor Code. The judge found that the PEO provided administrative services related to payroll and workers’ compensation insurance and that the PEO had absolutely no right to control or direct the day to day worksite activities of the deceased employee or any other client employee. Since the evidence did not establish an employer-employee relationship between the PEO and the deceased employee or between the PEO and any other of the client’s employees, he dismissed the case.

In a second decision, which also in large part turned on whether there was an employer-employee relationship, a federal judge in California dismissed a class action wage claim law suit, involving both state and federal claims that had been filed by two employees on behalf of current and former non-exempt employees whose job involved the transportation of propane. The judge found that under the California Labor Code the PEO needed to be “an employer” to be liable for wage violations. The judge stated that under California law there are three alternative definitions of the term “to employ.” These three definitions are:

(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work or (c) to engage thereby creating a common law employment relationship

Since the plaintiffs failed to allege any facts regarding (b) or (c), the exercise of control over the employee’s wages hours or working conditions was controlling. In this regard, the PEO needed to have “the power or authority to negotiate and set an employee’s rate of pay,” and not merely be involved in the preparation of an employee’s paycheck. The judge went on to state that the plaintiffs had not adequately alleged facts to establish that the PEO had the “power or authority to negotiate and set their rates of pay, beyond the mere responsibility to provide plaintiffs with payment” and, therefore, their state law claim failed.

With regard to their federal claim alleging a violation of the Fair Labor Standards Act the plaintiffs also failed to establish that the PEO was the plaintiffs’ employer or a joint employer. The judge held that the “totality of the circumstances” did not suggest that the PEO was a joint employer.

Unfortunately, the federal judge held that federal law allows for courts to “freely grant leave to amend when ‘justice so requires’” and, therefore, he granted the plaintiffs a final opportunity to amend their complaint. He concluded by stating: “Plaintiffs should take care to plead facts that indicate that [the PEO] had the power and authority to control the wages of the plaintiffs and other similarly situated plaintiffs in this case.”

These are two very favorable decisions for PEOs; however, while we have stated so many times that your Service Agreement language must be carefully drawn for all states, this is particularly true in California.