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State slapped down on misclassification: Employers don’t have to defend themselves twice

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in Employment Law,Human Resources

A California Court of Appeal has held that an employer does not have to endure two trials on whether its workers are employees or independent contractors. The decision was based on the legal principle of collateral estoppel, since the company had already litigated the issue with a state agency.

That’s potentially good news for employers that win a misclassification case before one agency. It means they won’t have to fight another agency over the same question.

Recent case: In 2003, Happy Nails, which owns several nail salons, restructured its business, turning cosmetologists working at its facilities into independent contractors rather than employees. In 2004, the state Employment Development Department (EDD) argued that the workers were em­­ployees, but lost on that issue before the Unemployment Insurance Appeals Board.

Nearly four years later, the Division of Labor Standards Enforcement (DLSE) cited and penalized Happy Nails for failing to provide itemized wage statements to its workers. The DLSE rejected Happy Nails’ argument that there was a prior finding showing that its workers were in­­dependent contractors. The DLSE held that the cosmetologists were em­­ployees.

Happy Nails sued the DLSE in state court to set aside the administrative decision. The trial judge denied the company’s request. Happy Nails appealed and the Court of Appeal reversed the judgment.

The court held that based on a five-factor test, collateral estoppel applies and Happy Nails cannot be forced to relitigate that issue. The five factors, according to the court:

“(1) the issue must be identical to an issue decided in a prior proceeding;

(2) the issue must have been actually litigated in the prior proceeding;

(3) the issue must have been necessarily decided in the prior proceeding;

(4) the decision in the prior proceeding must be final and on the merits; and

(5) the party against whom preclusion is sought must have been a party to or in privity with a party to the prior proceeding.”

Addressing the final factor, the court held that the EDD and DLSE were “in privity” with each other because both state agencies were “charged with enforcement of laws designed to benefit and protect employees.” The court even stated that the DLSE was bound by the stipulations that were agreed to by the EDD and Happy Nails in the first proceedings. (Happy Nails & Spa of Fashion Valley v. Julie Su, No. D060621, Califor­­nia Court of Appeal, 4th Appellate District, 2013)

Final note: This decision makes clear that different California state agencies don’t get “two bites at the apple” when it comes to assessing taxes or penalties against a California employer for misclassification issues.

Although the court’s decision was positive for the employer in this case, California employers should take a hard look at whether they have properly classified independent contractors.

Advice: Vigorously defend claims for unemployment benefits by independent contractors. That will help avoid triggering statewide audits or other penalties or fines that could potentially be assessed as a result of an adverse ruling.

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