Court of Appeal Clarifies Definition of Alter Ego and Joint Employer

by Julie Ann Giammona

In Turman v. Superior Court, the California Court of Appeal sent a warning to sole proprietor employers who have incorporated in the hopes of gaining the personal liability protections of a corporation: Beware of the joint employer and alter ego theories that can, and often do, remove the desired corporate shield.

In Turman, Arthur Parent was the president, sole shareholder and director of a restaurant that he incorporated as Koji’s Japan, Inc., as well as the president, sole shareholder and director of A. J. Parent Company, Inc. Parent was sued as an individual by his former restaurant employees for wage and hour violations alleging that he was a joint employer with Koji’s, and that Parent and A.J. Parent Company were alter egos of Koji’s. Although the trial court rejected both legal theories on appeal, the higher court determined that the trial court had misapplied the legal standards when scrutinizing the corporate entity.

With regard to the alter ego doctrine, the appellate court concluded that two requirements must be met to invoke the alter ego doctrine: (1) unity of interest between the corporation and its owner such that in reality no separate ownership exists and; (2) an inequitable result if the alleged wrongful conduct is treated as that of the corporation alone. The Turman court specifically stated that the corporate entity should be ignored and the acts of the corporation should be deemed the acts of the individual controlling the corporation where the corporate form is in some way used to accomplish a wrongful purpose; the wronged party need not prove actual wrongful intent at the time of formation.

With regard to the joint employer doctrine, the higher court reminded closely held corporations that the three-part definition of employer as set forth by the California Supreme Court in Martinez v. Combs (2010) 49 Cal.4th 35, is still the controlling law: (1) any person who exercises control over wages, hours or working conditions of another; (2) person who suffers, or permits another to work; and (3) any person who engages another. The appellate court specifically disavowed the trial court’s conclusion that where a corporate agent acts within the scope of his agency, no joint employment relationship exists. Were this the rule, no sole shareholder or officer of a closely-held corporation would ever be liable as a joint employer for wage violations.

Turman highlights the necessity for closely held corporations to be ever vigilant in complying with the corporate filing requirements and following the specific by-laws set forth at the time of incorporation. Although such compliance certainly does not guarantee that an allegation of alter ego and/or joint employer will not allow an attack on individual assets, it can at least provide a valuable defense where necessary.  Both alter ego and joint employment issues often present challenging, fact specific analysis. Ferber Law has the legal expertise to assist employers work through this maze to provide accurate and result-oriented advice.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.