California Supreme Court Rules That Corporate Officers and Directors Cannot Be Personally Liable For Wage Claims Under State Law

On August 11, 2005, the California Supreme Court ruled that corporate directors and officers cannot be held personally liable for a company’s failure to pay wages owed to its employees. Reynolds v. Bement, 36 Cal. 4th 1075 (2005).   Both the trial court and the Court of Appeals had ruled that individual corporate agents were not personally liable for unpaid overtime wages and dismissed them as defendants from the purported class action.  The California Supreme Court agreed, finding that the individual defendants were not “employers” under the Labor Code.

Plaintiff, Reynolds, was employed as a shop manager and assistant shop manager by an auto painter.  Reynolds filed a class action on behalf of himself and those similarly situated against his former employer, Earl Scheib, Inc., and Earl Scheib of California, Inc., as well as eight individual defendants who were shareholders of Earl Scheib.  Plaintiffs alleged numerous causes of action, including claims for failure to pay overtime under California’s Labor Code. 

The Labor Code provides employees with a private right of action to recover unpaid overtime wages against their employer.  However, the relevant Labor Code provision does not define the term “employer.”  Plaintiffs argued that the Court should adopt the definition of “employer” found in the wage orders set forth by a state administrative agency, the Industrial Welfare Commission (IWC), which defines the term to include an individual who “exercises control over the wages, hours, or working conditions of any person.”  As such, Plaintiffs sought to hold the eight shareholders liable for the alleged wage and hour violations.  The Supreme Court disagreed, concluding that the California Legislature did not expressed an intention to incorporate IWC’s definition of “employer” into the Labor Code so as to hold corporate agents personally liable for wage and hour violations.

This ruling is obviously significant for management in that it allows managers to make employment-related decisions without risk of personal liability.  However, employers should be aware that the federal counterpart to California’s Labor Code — the Fair Labor Standards Act (the “FLSA”) — defines “employer” to include individuals.  As such, courts have ruled that, under FLSA, individuals can be held liable for unpaid overtime where the individual has overall operational control of the employer, possesses an ownership interest in it, controls significant functions of the business, or determines the employees’ salaries and makes hiring decisions. Furthermore, the Supreme Court declined to require California’s Labor Commissioner to alter the way it handles administrative proceedings, which means that individuals still could be assessed penalties in the wage and hour context in such proceedings.  Therefore, California employers and their agents should view this decision with only cautious optimism.