The California Supreme Court today unanimously reaffirmed the principle that individual officers, directors and agents of a business cannot be held personally liable if the business fails to pay its employees wages and penalties. The decision, Martinez v. Combs, S121552, 2010 WL 1995830, also clarifies the definition of an employer, found in the California Industrial Wage Commission Wage Orders, in a way that further limits the scope of potential wage and hour liability.

The plaintiffs in Martinez were farm laborers who picked strawberries for an employer who in turn sold the produce to third parties for marketing. The plaintiffs filed a class action lawsuit alleging minimum wage violations against their direct employer, as well as the third party marketers and their officers and agents. Once the direct employer entered bankruptcy, the marketers and their officers and agents were the principal defendants.

Although the Martinez case arose in the context of agricultural workers, the Court’s opinion could have a much broader impact and will affect other industries as well, because the definitions of “employ” (“to engage, suffer, or permit to work”) and “employer” (“any person. . . who directly or indirectly. . . employs or exercises control over the wages, hours, or working conditions of any person”) at issue in the case are common to all of the California wage orders, not just the one governing agriculture.

The Court held that the defendants could not be held liable for the direct employer’s failure to pay statutorily-mandated wages. In doing so, it rejected the plaintiffs’ argument that the third-party marketers “suffered or permitted plaintiffs to work” because they knew of the plaintiffs’ work and benefitted from it. Since only the direct employer had the power to hire and fire the plaintiffs, set their wages and hours, and tell them when and where to work, the third-party marketers could not be considered the plaintiffs’ employer. The Court further rejected the plaintiffs’ claims against the individual officers and agents of the third-party marketers, affirming the Court’s prior decision in Reynolds v. Bement, 36 Cal. 4th 1075 (2005) that the definition of “employer” does not result liability for individual corporate agents acting within the scope of their official duties.

The Martinez decision affirmatively establishes the limited scope of liability for businesses that work with independent contracts who fail to properly pay their workers. It also confirms that individual officers, directors and agents acting on behalf of their company cannot be held personally liable for the company’s wage-and-hour violations under state law. While the outcome of this case is favorable to employers, it serves as a cogent reminder of the prevalence of costly wage-and-hour litigation in California.