California Court Clarifies Personal Liability of Managers for Unpaid Wages

It is well understood that California employers will become liable if they fail to comply with laws and regulations pertaining to the payment of minimum wages, hours and days of work, reimbursement of employment expenses incurred by employees, and the required information on employee payroll statements that includes how wages were calculated and similar earnings details.  But what about thinly-capitalized businesses that simply fold up the business, only to create a new but virtually identical business the next day, when employees bring legal action for unpaid wages and violation of wage and hour regulations?  What remedies do aggrieved employees then have?

The California Legislature sought to address this issue of “wage theft,” in part, by imposing personal liability on business owners and managers and enacted Labor Code  Section 558.1, effective as of January 1, 2016.  In addition to liability imposed on the employer, Section 558.1 created liability for any “other person acting on behalf of an employer who violates, or causes to be violated, any provision regulating minimum wages or hours and days of work,” and other provisions of law involving the timing of payment of final wages, wage statement requirements, reimbursement of employee expenses, and the like, who “may be held liable as the employer for such violations.”  A person acting on behalf of an employer was defined as “a natural person who is an owner, director, officer or managing agent of the employer.”

Since its enactment, issues have arisen whether aggrieved employees had a private right of action to pursue managers for unpaid wages, or whether the State alone, through the Labor Commissioner, was entitled to pursue such claims.  Likewise, questions have arisen whether the imposition of personal liability was required, or was merely discretionary, since Section 558.1 uses the term “may be held liable as the employer,” rather than they “must” or “shall be” held liable as the employer.  A recent California Court of Appeal decision addresses those issues in a case entitled Seviour-Iloff v. LaPaille decided on June 28, 2022 (“Seviour-Iloff”). 

Plaintiffs were employees of Bridgeville Properties, Inc. (“BPI”) and filed wage claims with the California Division of Labor Standards Enforcement (“DLSE”) against BPI and its Chief Executive Officer/Chief Financial Officer Cynthia LaPaille for unpaid wages in violation of the Labor Code.  BPI owned property in unincorporated Humboldt County, including eight rental units, a post office and its own water system.  The Plaintiffs, husband and wife, acted as property managers and collected rent for BPI.  The husband also promised to keep the water system running, maintain and control the weeds and generally provide handyman services. BPI acknowledged that Plaintiffs were not paid for any work they performed for it apart from receiving free rent to live in one of the units.  BPI terminated Plaintiffs when it suspected the husband was not performing his maintenance duties and was stealing equipment and supplies.

The trial court had determined, among other things, that the Plaintiffs were employees of BPI, and the wife was entitled to unpaid minimum wages for 20 hours per week and the husband for 5 hours per week, plus interest. But the trial court determined that LaPaille, the CEO/CFO, was not personally liable for these unpaid wages. The husband and wife then appealed.

 A variety of issues were raised and addressed in the Court of Appeal decision, not of all which will be discussed in this article.  The appellate court determined that the trial court erred when it failed to hold LaPaille personally liable under Section 558.1 for unpaid wages. LaPaille had argued that Section 558.1 did not expressly authorize a private right of action and that the statutes contained a comprehensive scheme for enforcement by an administrative agency, that being the DLSE and the Labor Commissioner.  LaPaille also argued that, in any event, the trial court properly exercised its discretion in refusing to impose personal liability on her.  The appellate court rejected those arguments.

The Court of Appeal noted that while the Labor Commissioner is empowered to enforce labor laws, the Legislature also provided California employees with the private right to vindicate unpaid wages. For example, Labor Code Section 1194(a) provides that an employee receiving less than the legal minimum wage is entitled to recover the unpaid balance of a minimum wage or overtime claim in a civil action.  The appellate court reasoned that it would make little sense for the Legislature to authorize the Labor Commissioner to enforce actions against individuals, but bar the same recovery if employees opted to pursue a civil action, rather than initiate a proceeding before the Labor Commissioner.

Restating often-cited public policy, the appellate court held that California wage and hour regulations reflect the strong public policy favoring protection of workers’ general welfare and society’s interest in a stable job market.  Therefore, statutory provisions should be liberally construed with an eye toward promoting such protection.  It noted the legislative history of Section 558.1 demonstrated the Legislature was addressing “wage theft,” noting only a small percentage of employees who prevailed in their wage claims were actually able to recover unpaid wages.  The California Committee Report stated that “This bill . . . gives the Labor Commissioner the authority to hold individual business owners accountable for their debts to workers.  This will discourage business owners from rolling up their operations and walking away from their debts to workers and starting a new company.”  Therefore, the Appellate Court held that Section 558.1 must be interpreted as allowing for a private right of action by employees against business managers for unpaid wages, and reversed the trial court’s decision not to hold LaPaille personally liable for the unpaid wages.

The Court of Appeal also interpreted the language of the Section 558.1 to decide whether a person acting on behalf of an employer may be, or must be, held liable for unpaid wages.  While the language “may be held liable” admittedly implied a degree of discretion, the legal issue presented was who possessed that discretion:  the court, or the employee who sought to prosecute his or her claims?  The appellate court held that the word “may” was not directed to the courts, but to the complaining party.  It indicated that the complaining party may choose among several forms of relief.  The term “may” did not grant judicial discretion in imposing liability but, rather, reflected a recognition by the Legislature that the party prosecuting the wage violation might not need to pursue such liability if the employer did in fact satisfy the outstanding judgment.  The Court of Appeal therefore held that the trial court was obliged to hold LaPaille personally liable for unpaid wages under Section 558.1. (“Allowing courts to excuse such individual liability would undermine the purpose of [Section 558.1] to facilitate an employee’s ability to recover unpaid wages.”)

THE TAKEAWAY

         While review of this appellate court decision by California’s Supreme Court could still occur, it is wise for business owners and managers to take seriously the risk of personal liability for wage violations identified in Section 558.1, and take action now to confirm that their businesses are in strict compliance with the seemingly ever-changing wage and hour requirements of the law.  Businesses in California should verify that their payroll systems, and outside payroll companies if they are used, are fully conversant with California wage and hour laws.  Further, periodic audits of payroll procedures should be standard operating procedure to ensure that those responsible with minimum wage, meal and rest periods, payment of final paychecks of departing employees and the information required on payroll statements, are in fact complying with the requirements of the law. Fair warning has now been given.  If mistakes are being made, the owners, directors, officers and managing agents risk personal liability if their businesses are unable or unwilling to pay for adverse judgments for the wage and hour violations identified in California Labor Code Section 558.1.