• Individual Liability in California -- Wage Hour Violations
  • August 19, 2003 | Author: John K. Skousen
  • Law Firm: Fisher & Phillips LLP - Irvine Office
  • A recent decision by a California appeals court, Reynolds v. Christian Bement (2003) 107 Cal.App.4th 738, 132 Cal.Rptr.2d 384, makes new law with regard to liability imposed by California wage-hour laws upon individuals who exercise control over employees. If not reversed or depublished by the California Supreme Court, the decision will effect the landscape of individual liability in California.

    The wage-hour laws regulating the conditions of employment in California are contained primarily in California's Labor Code, Government Code, and in the wage orders promulgated by California's Industrial Welfare Commission ("IWC"). The Division of Labor Standards Enforcement ("DLSE") is the government agency charged with enforcing California's wage-hour laws. The IWC's wage orders impose liability for violations of the wage-hour laws upon an "employer," which as defined in part by the wage orders as follows:

    "[A]ny 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 any person."

    (Wage Order 9-2001) (Cal.Code Regs., tit. 8, § 11090, subd. 2(F) (Emphasis in original).

    In Reynolds, a former Earl Scheib shop manager, Steven Reynolds, filed a class action alleging violations of Section 17200 of California's Business and Professions Code and a cluster of public policy and tort claims against officers and directors of Earl Scheib, Inc., and Earl Scheib of California, Inc., alleging that he and the class members were misclassified as employees exempt from overtime and that unlawful deductions were taken from his compensation. Interestingly, the allegedly unlawful deductions included deductions for cash shortages where Reynolds agreed in advance that any such deductions would be based upon his "gross negligence."1 The trial court sustained a demurrer on several causes of action, and the appeals court affirmed.

    A core issue in Reynolds was whether the individual officers and directors could be liable under the pleaded allegations as an "employer" for the unpaid wages -- in other words, that they would have to pay the class members the unpaid wages (as opposed to being subject only to penalties or potential criminal culpability). Section 558 of the Labor Code provides as follows, in pertinent part:

    558. (a) Any employer or other person acting on behalf of an employer who violates, or causes to be violated, a section of this chapter or any provision regulating hours and days of work in any order of the Industrial Welfare Commission shall be subject to a civil penalty as follows: (1) For any initial violation, fifty dollars ($50) for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages. (2) For each subsequent violation, one hundred dollars ($100) for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages.

    Labor Code § 558(a) (emphasis added). The above language, "in addition to an amount sufficient to recover underpaid wages," would seem to suggest that an individual "acting on behalf of an employer," would be liable to pay the underpaid wages in addition to the penalty.

    Despite the wording of the statute, the appeals court construed the work order and various Labor Code provisions together and held that an individual defendant otherwise meeting the definition of "employer" under the wage order would not be liable for the unpaid wages. The court reasoned that the wage order's definition of "employer" has "nothing to do with imposition of civil liability for overtime wages...," but rather, operates to make only employers liable, excluding their agents. The court further noted that Section 558 provides only for civil penalties against "employers or their agents." Reynolds, 107 Cal.App.4th at 749-50. The court made particular mention of Labor Code § 1194, noting as follows: "Most tellingly, Section 1194, which specifically authorizes an employee to bring a civil action for overtime wages, does not enumerate persons, agents, managers, superintendents, or officers as parties who may be liable in a private civil action." Id. at 750.

    Again, the court's central holding was that the above civil penalties against an employer's agents individually (i.e., $50 or $100) did not include exposure for payment of the underlying unpaid wages. The court concluded as follows:

    Thus, the Legislature has determined that the party "employing labor" bears the burden of complying with the wage and hour laws. In contrast, only misdemeanor penalties and civil fines can be imposed against persons acting on behalf of an employer or officers and agents of the employer.

    Id. at 749-50 (emphasis added).

    In support for the distinction drawn between liability as to employers and their agents, the court cited by analogy to Reno v. Baird (1998) 18 Cal.4th 640, 76 Cal.Rptr.2d 499, where the California Supreme Court held that only the employer could be held liable for acts of discrimination, whereas an employee could be held liable for acts of harassment.

    Significantly, the Reynolds court rejected the Plaintiff's reliance on the definition of employer used by Bureerong v. Uvawas (C.D. Cal. 1996) 922 F.Supp. 1450. In that case, the federal court adopted the broader definition of employer used by the Fair Labor Standards Act ("FLSA"). The Reynolds court acknowledged the DLSE's heavy reliance on the Bureerong definition of employer in construing California's wage orders, but the court would not give any weight to a DLSE advisory opinion relying on it, noting that the FLSA's definition of employer was not controlling with regard to the definition of employer in the California wage orders. Reynolds, 107 Cal.App.4th at 751-53.

    Although corporate officers and decision makers may find some comfort in the Reynolds decision, it is clear that the possibility of personal liability remains under other theories of recovery. The court further held that corporate officers or agents could suffer personal liability on a theory of tort if they participated in specific tortuous activities, but that mere breach of duty would not impose such liability. Id. at 754.

    In Reynolds, the court held, however, that given the complaint as pleaded, the facts did not rise to a level that would impose personal liability. For example, the court held that the allegations in the first (failure to pay overtime) and third (unlawful deduction) causes of action -- which named only Labor Code violations -- were insufficient to "give notice" of personal liability on a theory of tort. Notably, the boilerplate allegations stated that the defendants ratified, authorized, directed, sanctioned, consented, cooperated, approved, and conspired and planned to carry out the unlawful practices. The court further reasoned, however, that none of the individual defendants were specifically described as participants. Id. at 756. The court further explained that the causes of action were nothing but a "list of general allegations, vaguely alleging a conspiracy." Id. The court also rejected the fourth cause or action alleging conversion against the officers personally in part because there was no allegation that they had personal possession of the wages or power to deliver the wages to the class. Id.

    Similarly, the court held that the eleventh cause of action alleging violations of Section 17200 of California's Business and Professions Code failed because the pleaded facts were not if sufficient particularity to show personal liability and because the pleaded facts failed to show how members of the public are likely to be deceived. Id. at 759.2 In light of the frequent abuses of Section 17200 by California plaintiffs, this ruling is a reminder that such actions must be pleaded adequately and with sufficient particularity or they will be subject to dismissal before trial.

    What import does Reynolds have for employers in California? Three points should be emphasized. First, the Reynolds court affirmed the trial court's order sustaining the defendants' demurrer with leave to amend. Therefore, although restrictions were imposed on the scope of personal liability for payment of wages under California's wage-hour laws, the implicit message in Reynolds is that the complaint could possibly be pleaded sufficiently to allege facts that would impose personal liability on individual defendants under various tort theories. For this reason, corporate officers or individuals acting on behalf of their employers still must take preventative steps to assure compliance with California's wage-hour laws, to monitor that compliance regularly, and to take immediate corrective action when violations are discovered.

    Second, a petition for review has been filed in the Reynolds decision. This was expected due to the large number (16) of amicus briefs filed on behalf of the plaintiff. Therefore, employers and their agents will not be able to rely on Reynolds and its construction of California's wage-hour laws until the disposition of the case is ascertained.

    Finally, regardless of how "personal liability" is defined, it always makes good sense for California employers and their officers to institute safeguards such as consulting with legal counsel frequently for specific guidance on wage-hour matters and conducting training for managers carrying out company policies with regard to compensation and payroll practices. In today's business environment, only through constant vigilance will the California employer be able to minimize the risk of exposure to the business or its officers.

    1In California, the wage orders provide as follows: "No employer shall make any deduction from the wage or require any reimbursement from an employee for any cash shortage, breakage, or loss of equipment, unless it can be shown that the shortage, breakage, or loss is caused by a dishonest or willful act, or by the gross negligence of the employee." (E.g., Section 8, Wage Order No. 9-2001) (emphasis added).

    2Section 17200 provides injunctive relief to consumers and businesses injured by unfair competition stemming from a defendant's illegal activities or business practices, including wage-hour violations. See, e.g., Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 96 Cal.Rptr.2d 518.