HAROLD C. BAIN, Plaintiff and Appellant,
TAX REDUCERS, INC., Defendant and Appellant.
Santa Clara County Superior Court Superior Court No. CV112065, The Honorable Thomas P. Hansen, Judge.
Attorneys for Plaintiff/Appellant Harold C. Bain: Richard D. Schramm Employment Rights Attorneys.
Attorneys for Respondent/Appellant Tax Reducers, Inc.: John P. McDonnell: Myers, Hawley, Morley, et al.
Defendant and appellant Tax Reducers, Inc. (TRI), appeals from a judgment after a court trial in which the court awarded plaintiff and respondent Harold Bain damages for unpaid wages (Lab. Code §§ 202, 203, 1194, & 1194.2) and for breach of contract based on a judicially supervised settlement of Bain’s wage claim. TRI argues that the court erred when it (1) held that Bain’s statutory wage claims were not barred by the statute of limitations; (2) applied the presumption that every person who performs services is presumed to be an employee; and (3) imposed statutory penalties pursuant to both sections 203 and 1194.2.
Bain filed a cross-appeal challenging the court’s rulings that James Brooks Griffin, TRI’s president and majority shareholder, could not be held personally liable for Bain’s wage claims.
On TRI’s appeal, we hold that Bain’s statutory wage claims under sections 202, 203, and 1194, which are subject to a three-year limitations period, were not time-barred because the limitations period was equitably tolled while Bain pursued his administrative claim before the Labor Commissioner. We conclude, however, that Bain’s claim for the statutory penalty for failure to pay minimum wages under section 1194.2 was time-barred because it is subject to a one-year limitations period and Bain’s complaint was not filed within one year of the date the action before the Labor Commissioner became final. Since Bain’s claim for the section 1194.2 penalty was time barred, we hold the trial court erred when it imposed that penalty. We do not reach TRI’s other contentions regarding the section 1194.2 penalty. We also hold that substantial evidence supports the trial court’s finding that Bain was an employee under the multi-factor test in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (S. G. Borello) and that there was no prejudicial error in the court’s use of the presumption of employment. And we conclude that the trial court did not err in imposing a section 203 penalty for TRI’s failure to timely pay final wages upon Bain’s resignation.
On Bain’s cross-appeal, we agree with the trial court that Griffin could not be held personally liable for Bain’s wage claims; thus, the trial court did not err when it denied Bain’s motion to amend the complaint to add Griffin as a defendant. Bain has also appealed the court’s orders relating to attorney fees, which we discuss in a separate opinion filed concurrently herewith in Case No. H038002.
For the reasons stated below, we will modify the judgment to strike the $7, 700 awarded to Bain as a penalty under section 1194.2. As so modified, we will affirm the judgment.
Description of TRI
TRI provides tax preparation and bookkeeping services to individuals and businesses. James Brooks Griffin has been the president and chief executive officer of TRI since 1997; Griffin owns two-thirds of the company’s shares. TRI had three offices in Santa Clara County and decided to expand by purchasing another tax preparation practice. In December 2004, TRI purchased a tax preparation and accounting service in Los Altos known as Conard and Associates, which was owned by Paul Conard. Harold Bain worked for Conard from April 2002 until December 31, 2004. Since TRI agreed to bring Bain on in the same capacity as he worked for Conard, it is necessary to describe Bain’s professional history with Conard as it relates to the question whether Bain was an employee or an independent contractor when he worked for TRI.
Bain’s Working Relationship With Conard & Associates
Before going to work for Conard, Bain worked as an accountant. He attended training classes in tax preparation offered by the Voluntary Income Tax Assistance (VITA) program and helped people do their taxes as a VITA volunteer, but he did not have a tax preparation business before working for Conard.
Bain did not bring any fee-paying clients with him when he started working for Conard, but he had a “couple” of friends, whose taxes he had previously done for free, who became Conard’s clients. Bain did not have tax clients of his own while he worked for Conard or TRI. The only outside “client” Bain had was the Los Altos Masonic Temple Association (LAMTA). Bain did LAMTA’s tax return as part of his duties as a member of its board.
When Bain started working for Conard, they agreed that he would be an independent contractor and that Conard would pay him $1, 100 for 32 hours of work per week. If Bain worked less than 32 hours in a week, Conard paid him on an hourly basis, based on the $1, 100 weekly rate ($1, 100 per week ÷ 32 hours = $34.38 per hour). If Bain worked 32 hours or more a week, Conard paid him the $1, 100 weekly salary. Initially, Bain prepared an invoice for Conard and was paid every two weeks. Conard did not make any withholdings from Bain’s pay and reported Bain’s income as “non-employee compensation” on a 1099 form. Since Conard issued him a 1099 form, Bain reported his income to the IRS on a Schedule C (Profit or Loss From Business) form. Bain and Conard did not have a written agreement describing their relationship.
While working for Conard, Bain went through the examination and investigation process necessary to become an “enrolled agent” with the IRS. After obtaining that certificate, Bain was authorized to appear before the IRS. Bain’s status as an enrolled agent did not require that he work as an independent contractor.
Bain’s duties at Conard and Associates evolved over time and eventually included setting up and dissolving corporations, and consulting on and maintaining computer networks. Bain helped Conard with advertising, pricing, hiring employees, and selecting clients; he managed the office when Conard was gone.
In the summer of 2004, Bain and Conard attended a seminar on the tax implications of using employees versus independent contractors. During the seminar, they both realized that Bain was actually an employee of Conard and Associates, not an independent contractor. They agreed to continue their relationship as usual until the end of 2004 and that Conard would begin withholding taxes and treating Bain as an employee beginning January 1, 2005. On July 9, 2004, Bain stopped giving Conard invoices for his services and began reporting his time on the same time sheet used by Conard’s employees.
Bain’s Working Relationship with TRI
In December 2004, one month before the date Conard had agreed to begin treating Bain as an employee, Bain and Conard’s other two employees learned that Conard had sold his practice to TRI. They were worried about their jobs, so they asked Bain to represent them at a meeting with the new owner and to ask whether they would still have jobs after January 1, 2005.
Bain met with Griffin in mid-December 2004. At that meeting, Griffin told Bain they would all have jobs after January 1, 2005, and would be paid the same as before. Griffin said he had no interest in terminating the others, but said he was not sure he would be able to retain Bain past tax season because he thought Bain was too expensive. Bain made a suggestion for increasing revenue to justify keeping him on. Bain and Griffin did not discuss whether Bain would be an independent contractor or an employee.
After TRI acquired Conard and Associates, Bain and the other former Conard employees continued working in the same office space Conard had occupied. By January 2, 2005, no one had received a job application from TRI. That day, Bain put together a packet consisting of a W-4 form (withholding certificate), an I-9 immigration form (Employment Eligibility Verification), and copies of his enrolled agent certificate, his social security card, and his passport. Bain placed the packet on Griffin’s desk. Griffin denied receiving those documents.
In January 2005, Bain attended at least three meetings with Griffin and other staff in which Griffin presented new tax software, demonstrated the software, and gave a presentation on TRI, describing the Conard acquisition as a “high end tax preparation office.” Bain went to the same meetings as other staff members, as Griffin told Bain to attend all staff meetings.
Griffin testified that tax preparation was the essential function of TRI’s business. Bain’s duties at TRI included preparing tax returns, bookkeeping services for clients, computer network maintenance, meeting with prospective new clients, researching tax questions, training other staff, attending continuing education meetings, answering phones, assembling tax returns, and filing.
After they started working for TRI, Griffin instructed Bain and the other former Conard employees to continue using the same weekly time sheets they had used while working for Conard. On the time sheets, the staff recorded the total number of hours worked each day, as well as information about the specific tasks accomplished, for both time that was billable to clients and non-billable time. The billable time entries included the name of the client, the type of task performed, the date, and the amount of time attributable to each task. Thus, the time sheets were used both as a time card and to record information that was used to bill clients. Bain and the other staff members recorded their time daily and turned their time sheets in to Griffin weekly. Bain never invoiced TRI separately for his time. TRI paid the other staff members, but not Bain, every two weeks beginning in mid-January 2005.
After TRI acquired Conard and Associates, Bain no longer performed management functions; those were assumed by Griffin. Bain testified that Griffin was his supervisor. Griffin testified that he controlled how the Los Altos office operated. In addition, all the tax returns Bain prepared were reviewed by TRI’s night auditor, who reviewed the work done by all of TRI’s tax preparers. After the night auditor reviewed Bain’s returns, he left a list of things that needed to be corrected or researched further. Griffin told Bain that he had to follow the auditor’s instructions until he and the auditor came to a mutual resolution of the issues involved.
Bain did not operate an independent tax business while working for TRI. He did not maintain a separate office for a tax preparation business, advertise his tax preparation services, have his own website, have his own employees, or buy errors and omissions coverage. TRI provided Bain with a business card. Bain worked for TRI on TRI’s premises. TRI established the office hours (8:00 a.m. until 5:00 p.m.) and Griffin told the staff he expected them to be in the office during those times. According to his time sheets, Bain generally started work between 7:30 and 8:30 a.m. and left between 4:00 and 5:30 p.m. During the seven weeks Bain worked for TRI, he took one sick day, plus time off for a doctor’s appointment and for personal business; each time, he discussed the time-off request with Griffin. Bain did not pay for the office space he used at TRI. TRI gave Bain a set of keys to the office, just like it did other employees. When expanding his business, Conard did not have a lot of money, so Bain lent him a desk, a chair, a wall unit, and a printer stand, which Bain used in his office. Bain continued to use his own office furniture after TRI purchased the practice. Bain purchased his own keyboard and computer mouse, which he preferred over the ones Conard provided. TRI owned the rest of the office furniture, the computers, the photocopier, the filing cabinets, and the phones. TRI provided all of the office supplies.
TRI controlled which clients Bain saw. Griffin took over at least one individual client that Bain had previously handled; he told Bain that he wanted him to work primarily on corporate and partnership returns and more complex individual returns. TRI established the rate schedule and billed the clients. However, the tax preparers determined which rate to charge from the schedule, based on the scope and breadth of the services provided.
At the end of January 2005, Bain asked Griffin when he would be paid. On February 5, 2005, Griffin left an independent contractor agreement on Bain’s desk. The agreement proposed paying Bain $27.50 per hour (less than what Conard had paid) and terminating Bain’s services on June 30, 2005. Bain believed he was an employee and Griffin was trying to change his status from employee to independent contractor. Bain found the agreement unacceptable and returned it to Griffin with a note that stated, “Let’s do employee status without a ten percent reduction.” Later, Bain and Griffin discussed the independent contractor agreement. Griffin explained that he got the $27.50 hourly rate by dividing Bain’s weekly rate ($1, 100) by 40 hours. Bain explained that his pay was based on a 32-hour week and told Griffin that he was supposed to be an employee, not an independent contractor. Griffin said he would discuss the matter with Conard.
Bain resigned from TRI on Friday, February 18, 2005. In his resignation letter, Bain stated that since TRI had failed to pay him for seven weeks and failed to reimburse him for expenses he had submitted, Bain did not “feel it necessary to give the customary two week notice.” Bain told Griffin he would remove his belongings from the office by Sunday, February 20, 2005.
Griffin responded to Bain’s letter in writing on February 19, 2005. Griffin presented Bain with a modified independent contractor agreement in which he agreed to pay Bain $1, 100 per week for seven weeks of work. Griffin’s letter stated that before TRI would pay Bain, Bain would have to sign the modified independent contractor agreement and to provide information about work in progress, a missing client file, and the segregation of TRI software from Bain’s personal software. Griffin left the letter and the modified agreement on Bain’s desk. Bain saw the letter and the agreement on February 20, 2005. Bain did not sign the modified agreement because he believed it changed his employment conditions retroactively and restricted his ability to work.
On March 1, 2005, Bain filed a claim for his unpaid wages and expenses with the California Labor Commissioner. On March 17, 2005, Bain sent TRI a letter demanding his unpaid wages and expenses. On March 23, 2005, Griffin sent Bain a letter stating that TRI’s offer to pay $7, 700 in wages “still stands.” But, Griffin did not tender a check. TRI has never paid Bain for his work. Griffin testified he never paid Bain because they could not reach an agreement for him to be paid.
Because of the statute of limitations issues presented, including the question of equitable tolling, we shall describe the complex procedural history of this case.
Proceedings Before the Labor Commissioner
In his complaint before the Labor Commissioner, Bain claimed $7, 700 in unpaid wages, $157.26 for unpaid expenses, and $6, 600 in waiting time penalties ($220 per day for 30 days; § 203), plus interest. Bain represented himself in the proceedings before the Labor Commissioner.
TRI filed a written response, which alleged that Bain was not entitled to wages or penalties because he was never an employee and because his “sole relationship to [TRI] was business to business.” TRI alleged Bain never filled out an employment application or W-4 forms and refused to sign an independent contractor agreement. Griffin admitted that TRI had several employees and that Bain was the only one he considered to be working as an independent contractor. TRI argued that even if Bain was an employee, the parties never agreed to an amount to be paid as wages and that Bain was therefore “entitled to minimum wage and no more.” TRI contended that Bain was not entitled to penalties under section 203 because he was never an employee and had “rebuffed multiple attempts to finalize the contract and get paid.” TRI also argued that it would be “unconscionable” to allow Bain to “profit... from his intransigence” and urged the department to “decline to intervene in this contractual dispute.”
The Labor Commissioner conducted a hearing on March 9, 2006, more than a year after Bain filed his claim. Griffin appeared on behalf of TRI at the hearing and gave Bain a check for $157.26 to cover his business expenses. The hearing officer found that although TRI considered Bain an independent contractor, Bain did not meet the criteria established in section 2750.5 for independent contractor status, and concluded that the parties had an employer-employee relationship. The hearing officer awarded Bain $7, 700 “for wages (with lawful deductions), ” $805.86 in interest (§ 98.1), and $6, 600 in waiting time penalties (§ 203), for a total award of $15, 105.86.
First Action in the Superior Court (TRI’s Appeal of Labor Commissioner’s Decision)
TRI retained counsel and appealed the Labor Commissioner’s decision to the superior court (Santa Clara County Superior Court Case No. 1-06-CV063080). Although labeled an “appeal, ” the proceedings in the superior court are actually a trial de novo, in which the decision of the Labor Commissioner is not entitled to any weight. (Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1116 (Murphy).) As required by section 98.2, subdivision (b), TRI deposited $15, 105.86 (the amount of the Labor Commissioner’s award) with the superior court. Bain retained counsel of his own and the case was initially set for trial on July 24, 2006.
Efforts to Settle in July 2006
In July 2006, the parties agreed to settle the case for $9, 791, which included $7, 700 for Bain’s wage claim, $1, 000 for attorney fees, and $1, 091 in interest. TRI gave notice of the settlement to the court and the trial date was vacated. Later, however, they were unable to agree on the scope and terms of a written release. The parties disputed whether the settlement included a release of all claims or just the wage claim that was adjudicated before the Labor Commissioner. There were additional issues between the parties, including a non-competition claim and a defamation claim by Bain, which was based on things Griffin said about Bain after he left TRI. At one point, Bain offered to execute a general release of all ...