California fast food restaurants take advantage of wage law loophole

Overburdened labor enforcement agency says violations are difficult to prove.

By Jessica Goodheart, Capital & Main

This story is produced by the award-winning journalism nonprofit Capital & Main and co-published here with permission.

Margarita Garcia’s COVID-induced absence from her Subway sandwich maker job left her without wages for 11 days in 2021. With her family dependent on her income, she said, the absence of sick pay forced the San Jose resident to borrow from friends and family to cover rent and food.

Last winter, she filed a wage claim with the state labor commissioner, seeking $930 in unpaid sick pay, mandated by a COVID-era law. She also made a $5,487 claim for over a year of missed breaks.

A year and half later, Garcia is still struggling to recover those funds. California fast-food franchise owners are allegedly short-changing workers out of overtime and minimum wages in a way that officials say is difficult to combat. They are taking advantage of a common business arrangement: operating restaurants using multiple limited liability companies. That allows them to configure themselves as multiple small businesses instead of a single larger one, or to pay individual workers with checks from two different entities.

Operating a portfolio of restaurants under multiple limited liability companies is a tactic used by many businesses to reduce legal exposure. By structuring operations in this way, an operator can shield its restaurant group from lawsuits that arise from customer complaints and employee disputes. When businesses use that structure to violate the law, it presents a special burden to the state’s labor enforcement agency, which must pour investigative and legal resources into these cases.

The California Labor Commissioner’s Office confirmed that fast-food franchise owners have used this business setup to sidestep labor regulations, denying workers overtime, minimum wages and breaks.

Garcia claims her former boss falsely portrayed himself as having fewer than 26 employees, which would exempt his business from the state’s COVID sick pay law, which guaranteed up to 80 hours of paid sick time. During a conference call with a deputy labor commissioner, her employer, Rajiv Kohli, said that Garcia was one of about 16 workers employed by Alameda Subs LLC, according to her complaint.

Garcia alleges Kohli’s Subway franchise is run by multiple limited liability companies, or LLCs, to divide the numerous Subway shops he owns into separate legal entities.

Reached by phone, Kohli said he would not comment for this story.

When he applied for pandemic assistance in 2021, Kohli maintained on some loan applications that he had 115 employees. His Subway group benefited from almost $1.2 million in paycheck protection loans, according to Garcia’s complaint.

The notoriously backlogged Labor Commissioner’s Office, which has wait times for addressing claims of more than two years, must pour extra resources into taking actions against employers using such schemes. Each investigation requires more investigative legwork and more legal firepower.

Garcia, interviewed through an interpreter, said in Spanish that Kohli “would often tell us he had 14 restaurants.” Garcia’s case is still under review.

When franchise restaurant groups parcel out stores to individual LLCs, it adds additional complexity to the already fragmented fast-food industry. The franchising model of most fast-food outlets shields major brands like Subway, Burger King and McDonald’s from legal responsibility for their workers, because they are directly employed by individual franchise owners, not the corporate parent.

Meanwhile, franchisees shield their investment from legal claims by operating restaurants using multiple LLCs. Franchised restaurants that exploit this structure to breach labor laws not only place a burden on California’s labor enforcement agency, it also disempowers workers, who frequently hesitate to voice any complaints.

And fast food is not the only industry to evade labor laws by masquerading as a small business or by paying individual workers with checks from different legal entities controlled by the same owner. This practice has surfaced in the restaurant industry more broadly and in the residential care industry, which includes nursing homes and assisted living facilities.

Large employers may circumvent minimum wage requirements by representing themselves as smaller employers, according to the Labor Commissioner’s Office. When the state increased the minimum wage in 2013, it permitted small employers to implement the raise more gradually. “For example, the employer may apply a lower state minimum wage that applied to small employers until January 1, 2023, as each location ‘employed’ fewer than 25 workers at a time,” the Labor Commissioner’s Office wrote in an email.

Wage and hour investigators have also encountered employers using multiple legal entities to skirt overtime rules. Jose Luis Aguilar, a former Jack in the Box worker, alleged his employer was engaged in such a scheme in a 2021 complaint he filed with the Labor Commissioner’s Office.

Aguilar worked shifts at both a Jack in the Box in Castro Valley and another about seven miles away in San Leandro. (He was subsequently transferred from the San Leandro outlet to another in the same town.) The restaurants were owned by different LLCs (Kahani Restaurants LLC and Dhillon & Hurtado LLC) but operated in fact by Priya Dhillon, according to Aguilar’s complaint filed with the Labor Commissioner’s Office.

Aguilar alleged that he worked 16-hour days but did not receive overtime pay because his workday was split between two restaurants.

Aguilar also alleged that for several years he worked a double shift at the Castro Valley location, but his paychecks came split among the two entities — with no overtime pay. Aguilar now lives in Mexico and could not be reached, according to Ingrid Vilorio, a former co-worker. Vilorio said Aguilar took on this schedule after the manager found out that he was working another job at a restaurant unconnected to Jack in the Box.

The extra shift was presented to him as a favor, a way to save on gas and commuting time, said Vilorio. But the arrangement allegedly led to grueling working conditions. “I often worked double shifts (16 hours per day) straight through with no rest breaks or meal breaks, five days a week, Monday through Friday,” Aguilar wrote in his complaint. His claim to the Labor Commissioner’s Office: more than $59,000 in unpaid wages, not counting penalties. He reportedly settled his case with the owner, Priya Dhillon, whose office did not respond to repeated requests for comment.

Many low wage workers do not complain about wage theft because they fear retaliation.  A Subway worker who declined to be identified said she is working a double shift at two restaurants owned by the same owner without receiving overtime. She has not filed a complaint with the Labor Commissioner’s Office: “This is my only support,” she said. “What am I supposed to do?”

The extent of the practice is unknown because the Labor Commissioner’s Office does not track it. The office said it is committed to investigating these cases, although they present a burden to the office. The office has the task of bringing to bear “complex legal theories” that “complicate an otherwise straightforward evidentiary hearing.” Before leveling any charges, the Labor Commissioner’s Office says it must establish that “these multiple entities operate as one” and that interconnected companies are responsible for each other’s actions. It may even be required to prove that the individual companies constitute a single tax filer.

Susan Pace Hamill, a law professor at the University of Alabama and an expert in limited liability companies, suggested that updating California law could streamline the enforcement of such cases. The Labor Commissioner’s Office shouldn’t need to prove that a group of businesses represent a single tax filer to hold them accountable for wage and hour violations, she said. “That has nothing to do with where the levers of power are,” Hamill said.

Regardless, three and half years later, Garcia is still in debt. “I knew that the government was supposed to be helping people, but I wasn’t getting any of that help,” she said.

Copyright 2023 Capital & Main

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