Court of Appeal: Nail Salon Independent Contractors

Happy Nails owns a number of nail salons.  Their workers were independent contractors.  The EDD sought to classify them as employees and lost before the Unemployment Insurance Appeals Board.

The Division of Labor Standards Enforcement was not convinced and instituted proceedings against Happy Nails for not providing itemized wage statements, predicated on the theory that the cosmetologists were really employees.   Happy Nails argued that it already had litigated this issue and that the DLSE should not proceed based on the legal principle known as collateral estoppel.
The DLSE hearing officer ignored Happy's arguments and the prior decisions and held that the workers were employees.

Happy Nails sued the DLSE, claiming violation of due process, and seeking a writ of administrative mandate overturning the DLSE's findings.  The superior court denied Happy's motion for summary judgment on this claim and denied the writ.

The Court of Appeal decided that the trial court should have issued the writ and precluded re-litigation of the independent contractor question, based on collateral estoppel:

For an issue to be precluded from relitigation, the following requirements must be satisfied: (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. (People v. Garcia (2006) 39 Cal.4th 1070, 1077; Castillo v. City of Los Angeles (2001) 92 Cal.App.4th 477, 481 (Castillo).) As we explain below, each requirement is satisfied in this case.

The court analyzed each factor and decided that Happy Nails established them.  Therefore, the DLSE should have respected the UIAB's decision.

Although this is a procedure-based decision, there is some interesting law discussed in the opinion.  For example, the DLSE argued that the Happy Nails cosmetologists were once classified as employees until the company restructured its relationship with them.  Therefore, the DLSE argued, they could not be re-classified as contractors.  Not so, said the court:

The law[] does not require private parties to share the Commissioner's "once an employee, always an employee" mindset. Rather, private parties are free to change the nature of their business relationship in accordance with the "long-standing established public policy in California which respects and promotes the freedom of private parties to contract" (Brisbane Lodging, L.P. v. Webcor Builders, Inc. (2013) 216 Cal.App.4th 1249, 1262) and which allows them "the widest latitude in this regard" (Stephens v. Southern Pacific Co. (1895) 109 Cal. 86, 89). Our adoption of the position advocated by the Commissioner's counsel at oral argument would effectively nullify the Board's determination and would impermissibly deny Happy Nails and the cosmetologists "their freedom to contract as they please" (Rosen v. State Farm General Ins. Co. (2003) 30 Cal.4th 1070, 1080), which they exercised by restructuring their business relationship.

It also bears noting that this decision holds that different government agencies are considered the same for collateral estoppel purposes when their interests are similar.  Here, the Employment Development Department and DLSE share the common purpose of protecting workers from mis-classification.

Finally, the court sent the case back to the trial court so that it could consider Happy's request for an injunction against the DLSE, prohibiting future claims unless it showed there was a material change, and for attorney's fees.

The case is Happy Nails and Spa of Fashion Valley L.P. v. Su and the opinion is here.