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Corporate Officers Not Personally Liable for Employer's Unpaid Wage Debt

  • August 15, 2005

The California Supreme Court has ruled unanimously that the state's labor laws do not impose personal liability on corporate officers and directors for unpaid wages owed by a corporate employer. This includes unpaid overtime pay based on the erroneous classification of workers as exempt employees [Reynolds v. Bement, et al., Cal. Sup. Ct. No. S115823 (August 11, 2005)].

This decision eliminates a powerful weapon from plaintiffs' arsenals in wage and hour cases, particularly class actions, by removing the chilling effect personal liability would impose on managers who make business decisions on behalf of their employers.  Haunted by that possibility, managers may be more amenable to settlement on behalf of their business entities.  This ruling is consistent with others dealing with anti-discrimination laws and that  have recognized the importance of permitting management to make personnel decisions without fear of personal liability.

Class Action Suit for Unpaid Wages

The plaintiff was formerly employed by auto painter Earl Scheib, Inc., as a shop manager and assistant shop manager. He brought a class action lawsuit on behalf of himself and other shop managers claiming eight of the company's officers and directors were personally liable for failing to pay overtime compensation, unlawful deduction of wages, and other violations of the California Labor Code.

The plaintiffs alleged that, since the officers and directors "directly or indirectly … employed or exercised control over wages, hours, or working conditions" of the class members, the defendants were "employers" within the meaning of Industrial Welfare Commission (IWC) Wage Order No. 9, and so were obligated to pay wages and damages under the Labor Code. However, the trial court found that the plaintiffs' complaint did not support their claim that the individual company executives were liable, and the Court of Appeal agreed.

Supreme Court Refuses to Construe Definition of Employer as Including Managers

Section 510 of the Labor Code does not define the term "employer."  Turning to the plaintiffs' claim that the definition of "employer" in the IWC Wage Order should apply to hold the eight corporate officers personally liable for the unpaid wages, the California Supreme Court rejected that argument.  The high court found insufficient grounds to conclude that the California Legislature had intended to incorporate into the Labor Code the IWC's definition of "employer" as part of a unified remedial scheme for wage payment violations.

Rather, the high court said the definition of "employer" should be construed in light of state common law, unless the legislature clearly indicates otherwise. And, under the common law, "corporate agents acting within the scope of their agency are not personally liable for the corporate employer's failure to pay its employees' wages."

Accordingly, the California Supreme Court agreed with the Court of Appeal that the plaintiffs did not have sufficient grounds to sue the individual defendants. "Had the Legislature meant in section 1194 to expose to personal civil liability any corporate agent who 'exercises control' over an employee's wages, hours, or working conditions, it would have manifested its intent more clearly than by mere silence after the IWC's promulgation of Wage Order No. 9," the court concluded. 

DLSE Policies Not Due Deference

In its amicus curiae brief, the Division of Labor Standards Enforcement warned that the Court of Appeal's failure to accept plaintiff's theory of corporate agent liability might pose an obstacle to the Labor Commissioner's ability to recover some wages o wed to Californians. The DLSE therefore urged the Supreme Court to "recognize plaintiff's theory and direct California courts to apply it in private court actions…" However, the Supreme Court noted that the DLSE's policies in this regard were not promulgated in accordance with the Administrative Procedure Act and so were "not due general interpretive deference." Moreover, the court doubted its holding would have the sweeping effect the DLSE feared.

A Call to Mirror the FLSA

In a separate concurring opinion, Justice Moreno called on the legislature to revise California law to allow workers to recover unpaid overtime wages from corporate officers and agents in some limited circumstances. According to the Justice, the federal equivalent of California Code Section 1194 contained in the Fair Labor Standards Act "has long given workers this right under a definition of 'employer' that includes 'any person acting directly or indirectly in the interest of an employer in relation to an employee.'" And. "[g]iven the Legislature's stated commitment to the enforcement of the state's labor laws, and its willingness to entrust enforcement of those laws, in some cases, to workers themselves, it would make sense for the Legislature to extend the reach of section 1194 to include individuals who are directly responsible for the nonpayment of overtime wages but who hide behind the corporate form."

What Employers Should Do

This ruling favors high-level employees by relieving them of personal liability.  Although placing all liability for wage claims on corporate employers, the decision is favorable to business to the extent it permits managers to make business decisions without fear of personal liability.

However, the Reynolds decision does not mean that managers can relax their efforts to comply with California's complex wage-hour laws. In fact, the Supreme Court said that "nothing ... precludes hearing officers from finding individual corporate agents liable for unpaid wages when such liability is proven on established common law or statutory theories."  For example, individual employees may be liable when business entities are operated as "alter egos" of the individuals.  To avoid individual liability, businesses must observe corporate formalities and operate as entities truly separate from their owners and high level executives.

Jackson Lewis attorneys are available to assist employers in conducting an internal compliance audit of wage-hour practices and to modify practices and policies that create vulnerabilities. For more information about internal audits, or other wage and hour matters, please contact the Jackson Lewis attorney with whom you regularly work, or San Francisco managing partner D. Gregory Valenza, (415) 394-9400. 

©2005 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

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