Businesses owners need to understand the importance of choosing the right business entity and how to properly navigate the legal aspects of operating a business. Selecting a particular business entity and company structure can impact a company in a variety of different ways.

Whether a company is a formed as a corporation, a general or limited partnership, or a limited liability company, each entity has certain advantages and disadvantages. Some entity structures provide tax benefits not available to other entity structures. While other entity structures limit the personal liability of its owners and operators.

Importantly, if you own and operate multiple businesses, using different entities is crucial to limiting liability between different companies. Otherwise, if one company exercises certain control over another company then the dominant company may be liable for certain debts and obligations of the other company. A recent California lawsuit from an employee seeking unpaid wages highlights the importance of maintaining different entities and operating them separately.

A California corporation without employees deemed “employer”

In Castaneda v. The Ensign Group, Inc., a nursing assistant filed a class-action lawsuit on behalf of himself and other nursing assistants seeking nonpayment of minimum and overtime wages. The nursing assistants worked at Cabrillo Rehabilitation and Care Center. Instead of trying to recover the unpaid wages from Cabrillo only, the employee also sought recovery from a separate company, The Ensign Group, Inc. Even though Ensign had no employees, the employee claimed that Ensign was in fact his employer.

The employee presented various facts in support of his argument: Ensign owned Cabrillo. Ensign exercised control over Cabrillo’s operations and the employees, including promulgating Ensign’s core values and using Ensign forms and templates. Ensign owns a cluster of other companies that were also involved with Cabrillo. Ensign was formed to centralize human resources, accounting, and payroll for Cabrillo and the other cluster companies. Cabrillo employees were paid through another entity owned by Ensign. Furthermore, Ensign controlled many of Cabrillo’s systems and procedures, such as training materials and employee handbooks.

Initially, the trial court found that Ensign was not the “employer.” On appeal, however, the appellate court found that based on all of the evidence, “a trier of fact could reasonably infer that Castaneda and others who worked at Cabrillo were Ensign employees.”

California law has a broad definition of employer:

“any person . . . who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of [an employee]”

The appellate court found that the facts could support a finding that Ensign exercised the necessary control over the nursing assistants to be deemed their employers and liable for unpaid wages.

Contact a California business attorney

Any company seeking to limit its exposure from the activities of its related entities should seek legal assistance on how to properly form and operate a business entity. A California business attorney can advise you on these issues.

Janathan L. Allan, APC’s experienced California business attorneys help small and medium-sized businesses with effective businesses entity selection and planning. In conjunction with Allen Barron, Inc.’s tax, accounting, financial and management advisory services, Janathan L. Allan’s attorneys provide seamless and integrated business consulting and planning services.

Contact our San Diego business attorneys today for a free consultation or visit one of our Southern California locations.


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