A violation of the California Labor Code can be costly to a corporate employer. The risk of personal liability for owners, officers and managers of a corporation further raises the stakes.
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WAGE AND HOUR UPDATE
Are You Personally Liable
For Labor Code Violations?
Appellate Court Limits Personal Liability
By Christopher W. Olmsted
A violation of the California Labor Code can be costly to a corporate employer. The risk of personal liability for owners, officers and managers of a corporation further raises the stakes.
A series of California cases have addressed the question of personal liability for Labor Code violations. A recent case titled Bradstreet v. Wong eliminated at least one avenue for such liability.
Toha Quan and Anna Wong, husband and wife, were shareholders and served as corporate officers or directors, of Wins Corporations, three San Francisco garment manufacturing companies.
For several months in the summer of 2001, the Wins Corporations failed to meet payrolls, and to pay suppliers and other expenses. During this period, the owners told employees of the Wins Corporations that there was inadequate cash to meet the payroll, but that the employees would eventually be paid.
When employees began to complain about the failure of the Wins Corporations to pay their wages, the Division of Labor Standards Enforcement (DLSE) and the United States Department of Labor (DOL) took action.
Eventually the California Labor Commissioner and a public interest group sued on behalf of the unpaid employees, and the matter was tried to the court. The court issued a tentative decision holding Mr. Quan and Ms. Wong personally liable for $1 million in unpaid wages and vacation pay, and imposed statutory penalties. It also held that the failure to pay wages constituted an unfair business practice under California’s Unfair Competition Law (”UCL”).
However, the trial court later retracted the personal liability ruling when the California Supreme Court issued its ruling in a case titled Reynolds v. Bement. Applying the rule in Bement, he trial court refused to impose personal liability on the individual owners. The Labor Commissioner appealed.
The court’s opinion is a technical analysis of the California Labor Code and the Industrial Welfare Commission’s Wage Orders. The court examined certain Labor Code sections and determined that they did not call for personal liability.
Labor Code Section 510 mandates payment of overtime to employees working over 8 hours in a day or 40 hours in a week. But Section 510 does not state that individual corporate agents are personally liable for violations.
Labor Code 1194 permits employees to sue for minimum wage or overtime violations. But Section 1194 does not expressly impose liability on individual corporate agents.
Labor Code Section 1193.6 permits the Labor Commissioner to sue the employer for overtime or minimum wage violations. Although the wording in Section 1193.6 is slightly different than 1194, the court concluded that the section nevertheless does not impose personal liability on corporate agents.
The court’s ruling does not eliminate the possibility of personal liability for corporate managers, officers and owners. For example:
Alter ego liability. The court noted that individuals could still be held liable under a theory of “alter ego liability.” This form of liability could be imposed where shareholders of a corporation have failed to observe corporate formalities and have undercapitalized the business, among other factors.
Other Labor Code sections? The court limited its ruling to Labor Code Section 1193.6. It left personal liability under other Labor Code sections an open question for future cases. Employment law attorneys are aware of certain Labor Code sections that might lead to personal liability.
Unfair Competition Law (UCL), discussed below.
The court found that the owners were not personally liable under California’s Unfair Competition Law. The court noted that it is possible under the UCL to recover unpaid wages from corporate owners or officers, but in this case the remedy was not appropriate for several reasons. The owners did not personally misappropriate wages owed to the workers. For example, they did not pay themselves with corporate funds that would have otherwise paid the employees. The employees provided labor for the corporation, not the owners personally. The owners did not personally benefit from the labor, and it was the corporation, not the owners, who had the duty to pay the wages. Were that not the case, the court may have ordered the owners to personally pay the wages as “restitution.”
Unfortunately, the courts have not shut the door on personal liability. Recourse against individual owners and agents has been ruled out under certain Labor Code sections, but personal liability for corporate Labor Code violations remains possible under other sections, and other laws.
More Legal Update articles.
Download entire May Legal Update in PDF format.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2008 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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