Is a Foreign Parent an "Employer" for Wage and Hour Claims?

Posted by Rod Divelbiss

Wage and hour claims are some of the most "popular" and are potentially some of the most dangerous claims a corporation can face. Unfortunately, the standard for imposing liability for foreign parent corporations in the wage and hour context is broader than the typical claim for ignoring the corporate structure. A shareholder/foreign parent may be dragged into litigation and eventually found liable for the wage and hour “sins” of its United States subsidiary if the Court finds that foreign entity was also an “employer.” “Employer” is defined as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. § 203(d). Courts have held that two or more employers may jointly employ an employee and thus both be liable under the Federal Labor Standards Act. See 29 C.F.R. 791.2(a).

To determine whether a foreign parent may be considered an “employer” under the federal labor code, Courts “look to the economic reality” behind the relationship and typically consider the following four factors

  1. the foreign parent’s corporation’s power to hire and fire employees of the subsidiary,
  2. whether the foreign parent supervised and/or controlled employee work schedules or conditions of employment,
  3. the foreign parent’s role in determining the rate and method of payment, and
  4. whether the foreign parent maintained employment records.

Bonnette v. California Health & Welfare Agency, 704 F.2d 1465, 1470 (9th Cir. 1983); see also, Chao v, A-One Med. Servs., Inc., 346 F.3d 908, 918 (9th Cir. 2003) (citing 29 C.F.R. § 791.2(b)) in which the Court held that "[J]oint employment will generally be considered to exist when (1) the employers are not 'completely disassociated' with respect to the employment of the individuals and (2) where one employer is controlled by another or the employers are under common control.

California state law is similar. In Martinez v. Comb, 49 Cal. 4th 35 (2010), a case involving seasonal agricultural workers, the California Supreme Court held that the definition of “employer” does not encompass individuals or businesses that merely contracted with an employer. Rather the “employer” must exercise some control over the purported employee. Specifically, the Court held that "to employ" has three alternative definitions: (1) to exercise control over the wages, hours, or working conditions; (2) to suffer or permit to work; or (3) to engage, thereby creating a common law employment relationship.

Thus, the foreign parent’s role in dealing with the US subsidiary’s employees should be carefully evaluated. Otherwise, the foreign parent may well find itself embroiled in an expensive wage and hour claim with potential liability exceeding the value of the corporate US subsidiary.

Overview

As outlined above, the standard for imposing liability for foreign parent corporations in the wage and hour context is relatively broader than the typical claim for ignoring the corporate structure. In that context corporate liability can be extended to shareholders if the corporation does not act like a distinct entity