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Happy Nails & Spa of Fashion Valley, L.P. v. Su

California Court of Appeals, Fourth District, First Division

July 19, 2013

HAPPY NAILS & SPA OF FASHION VALLEY, L.P., et al., Plaintiffs and Appellants,
v.
JULIE A. SU, as Labor Commissioner, etc., Defendant and Respondent.

APPEAL from a judgment of the Superior Court of San Diego County No. 37-2009-00090193-CU-WM-CTL, John S. Meyer, Judge.

Law Office of Stuart Miller and Stuart Miller; Scott & Whitehead, R. Craig Scott and Diane D. Stalder for Plaintiffs and Appellants.

Deborah D. Graves for Defendant and Respondent.

IRION, J.

Happy Nails & Spa of Fashion Valley, L.P. (Happy Nails of Fashion Valley); Happy Nails & Spa of Mira Mesa, L.P. (Happy Nails of Mira Mesa); and The H & N Group Management Co. (H & N Group) (collectively Happy Nails) appeal the judgment denying relief on their verified complaint and petition (the complaint) against the Labor Commissioner of the State of California (the Commissioner). By the complaint, Happy Nails sought to set aside an administrative decision assessing civil penalties for its failure to provide cosmetologists who work at its salons with employee wage statements that itemize deductions. We agree with Happy Nails that a final decision of the California Unemployment Insurance Appeals Board (the Board) that the cosmetologists are not employees collaterally estops the Commissioner from assessing those penalties. We therefore reverse the judgment and remand the matter for further proceedings concerning other relief requested by Happy Nails.

I.

FACTUAL AND PROCEDURAL BACKGROUND

A. Happy Nails' Business

Happy Nails of Fashion Valley and Happy Nails of Mira Mesa are limited partnerships that own salons in which cosmetologists provide manicures, pedicures, and face and skin treatments to clients. H & N Group is the general partner of Happy Nails of Fashion Valley, Happy Nails of Mira Mesa, and other limited partnerships doing business under the Happy Nails name. H & N Group also provides management services to incorporated salons doing business under the Happy Nails name.

In 2001, Happy Nails hired a consultant to help restructure its business operations in such a way that the cosmetologists would be independent contractors rather than employees. By early 2003, Happy Nails implemented the changes recommended by the consultant at all of its salons.

B. The Proceedings Before the Employment Development Department and the Board

In 2004, the Employment Development Department (the Department), an entity within the Labor and Workforce Development Agency (Unemp. Ins. Code, § 301), issued assessments against H & N Group, Happy Nails of Fashion Valley, Happy Nails of Mira Mesa, and 35 other salons doing business under the Happy Nails name, for unpaid unemployment insurance contributions (id., § 1126). H & N Group and the salons petitioned the Department for reassessment. At the direction of the administrative law judge assigned to hear the petitions, H & N Group selected one salon (located in Chino Hills) and the Department selected another (located in Irvine) for a combined hearing. The parties later stipulated that the record from that hearing would be used to decide the reassessment petitions for the remaining 35 salons.

After a two-day hearing at which eight witnesses testified and more than 50 exhibits were admitted concerning business operations at the salons, the administrative law judge issued decisions granting the petitions for reassessment. Each decision states: "The issues in this case are whether the workers were employees of the petitioner and, if so, whether the petitioner is liable for unemployment, employment training, and disability contributions, personal income tax withholdings, penalties, and interest." After summarizing the facts regarding the conduct of business at the salons, the administrative law judge listed the factors relevant to determining whether a worker is an employee or an independent contractor, [1] and then applied those factors to the facts. Specifically, the administrative law judge found the cosmetologists were not terminable at will, but could only be terminated for death, bankruptcy, or gross violation of the written contract with the salon; the salons exercised no control over the cosmetologists, who used their own skill and judgment in performing services; the cosmetologists provided, at their own expense, many of the materials and all of the equipment they used; the cosmetologists were engaged in a skilled occupation that required many hours of training for licensure; and the processing of payments for services was handled by an independent third party. Based on these findings, the administrative law judge concluded the cosmetologists were independent contractors rather than employees, and therefore H & N Group and the salons were not liable for the contributions assessed by the Department. The administrative law judge later issued similar decisions reaching the same conclusions as to the other 35 salons, including Happy Nails of Fashion Valley and Happy Nails of Mira Mesa.

The Department appealed the administrative law judge's decisions to the Board. The Board affirmed the decisions in the cases involving the Chino Hills and Irvine salons on November 7, 2007, and affirmed the decisions regarding the other 35 salons on November 24, 2008. The Department did not seek judicial review of the Board's decisions.

C. The Proceedings Before the Division of Labor Standards Enforcement

In August 2008, the Commissioner, acting through the Division of Labor Standards Enforcement (the Division), an entity within the Department of Industrial Relations (Lab. Code, § 79), issued citations to and assessed civil penalties against Happy Nails for paying the cosmetologists who worked at Happy Nails of Fashion Valley and Happy Nails of Mira Mesa without giving them properly itemized wage statements (id., §§ 226, subd. (a), 226.3, 226.4). Happy Nails contested the citations and requested a hearing. (Id., § 226.5.) A combined hearing concerning the two salons was set for February 2009.

Before the hearing, Happy Nails submitted a brief with supporting exhibits in which it argued an evidentiary hearing was unnecessary because the prior decisions of the Department and the Board conclusively determined the cosmetologists working at Happy Nails of Fashion Valley and at Happy Nails of Mira Mesa were independent contractors and not employees. In the brief, Happy Nails complained that it had "already spent hundreds of thousands of dollars, and borne the burden of years of administrative proceedings, to determine that [its] [c]osmetologists are not employees." Based on the Board's decision and principles of collateral estoppel, Happy Nails urged the hearing officer "to 'avoid chaos' and make a determination consistent with that of the [Board]: that Happy Nails [c]osmetologists are properly classified as independent contractors." The Division submitted an opposition brief in which it contended for various reasons that application of collateral estoppel was "inappropriate in this case." The record contains no ruling by the hearing officer on the collateral estoppel defense raised by Happy Nails.

The hearing officer conducted a one-day hearing at which 10 witnesses testified and 31 exhibits were admitted concerning business operations at the salons. The evidence presented by Happy Nails and the Division was substantially the same as that introduced by Happy Nails and the Department at the prior hearing before the administrative law judge. On March 30, 2009, the hearing officer issued findings and orders affirming the citations and civil penalties assessed by the Division. After summarizing the testimony of the witnesses and describing some of the exhibits, the hearing officer considered various factors relevant to determining whether a worker is an employee or an independent contractor, [2] and concluded Happy Nails is subject to the civil penalties because the cosmetologists are employees, not independent contractors. The findings and orders did not mention the prior, contrary decisions of the Department or the Board.

D. The Proceedings Before the Trial Court

On May 20, 2009, Happy Nails filed the complaint against the Commissioner in which it challenged the Division's findings and orders. Happy Nails alleged that the Board's decisions that the cosmetologists working at its salons are independent contractors rather than employees are binding on all state agencies, and that the Division's contrary findings and orders subject Happy Nails to inconsistent legal obligations. Happy Nails also alleged the findings and orders were unsupported by the evidence, were issued in excess of the Division's jurisdiction, were the result of an unfair hearing, and violated Happy Nails' federal and state constitutional due process rights. Based on these allegations, Happy Nails asserted several separately labeled "causes of action"; and in the prayer for relief, it requested a writ of administrative mandate to set aside the Division's findings and orders (Code Civ. Proc., § 1094.5), a permanent injunction against future prosecutions of H & N Group or the owners of Happy Nails salons based on the contention that the cosmetologists working at the salons are employees; and attorney fees for violations of its federal due process rights (42 U.S.C. §§ 1983, 1988).

The Commissioner answered Happy Nails' complaint. In the answer, the Commissioner denied that the Board's decisions have preclusive effect on other state agencies and that the Division's findings and orders were unsupported by the evidence, were issued in excess of the Division's jurisdiction, were the result of an unfair hearing, or violated Happy Nails' due process rights. The Commissioner requested that Happy Nails be denied all relief demanded in the complaint.

Happy Nails moved for summary judgment on the ground that the Board's determination that the cosmetologists working at its salons are independent contractors, rather than employees, collaterally estopped the Division from issuing citations and assessing civil penalties for Happy Nails' failure to provide the cosmetologists with itemized wage statements. The Commissioner opposed the motion on the ground that collateral estoppel did not apply. The trial court denied the motion, stating that Happy Nails "ha[s] not shown that the issue sought to be precluded from relitigation is identical to the issue decided in the former proceeding, or that the issue was actually litigated in the former proceeding. [¶]... [¶] In addition, even if collateral estoppel applies, triable issues of fact exist relative to a ...


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