Managers generally may do their jobs without fear of personal liability for employees’ claims under California law. But a recent Ninth Circuit decision is a reminder to managers that they may not be entirely immune to claims for unpaid wages.
Personal Liability Under California Law.
Individual managers and supervisors typically cannot be held personally responsible under California law for wrongful termination (tortious and contractual), discrimination, retaliation, decisions classified as “personnel actions,” or acts in furtherance of the manager’s duties.
There are numerous policy reasons underlying this immunity. One is that managers would make self-interested decisions if they feared lawsuits for implementing the employer’s policies. Another is that there would be fewer good employees willing to accept a management job if the potential for personal liability was one of the perquisites. And, the employer usually is a corporation, which can provide an employee with complete relief.
Managers are not completely untouchable, though. California law provides for individual liability for some conduct that is not necessary to managers’ discharge of their duties, such as unlawful harassment. Employees also may sue individual managers for intentional torts falling outside the course of employment, such as physical battery. Claims that are based on statutes authorizing personal liability, such as for libel, are fair game as well.
Personal Liability for Unpaid Wages
Bosses justifiably breathed deep sighs of relief when the California Supreme Court held, in Reynolds v. Bement, 36 Cal.4th 1075 (2005), that individuals ordinarily cannot be held individually liable for wage and hour violations. California managers not in suspended animation since 1999 have noticed the flood of wage and hour lawsuits. These range from a single employee’s request for 30 days’ “waiting time pay,” to class actions seeking millions in damages for Labor Code violations.
The risk of an adverse award, or an expensive settlement, is particularly acute in California, where the wage and hour laws are detailed and not always clear. The legislature has seen fit to create a minefield of penalties that often dwarf the actual damages involved. Plus, a prevailing plaintiff may claim attorney’s fees, sometimes running into six- and seven-figure awards.
The Fair Labor Standards Act
The federal Fair Labor Standards Act also applies to most California employers. The Act does not make illegal a number of practices that California law renders unlawful, nor does it allow for the lucrative remedies California’s laws provide. Therefore, the Act usually receives little attention. But it is more employee-friendly when it comes to holding certain managers individually liable. The Ninth Circuit recently underscored this principle in Boucher v. Shaw, ____ DJDAR ____ (July 27, 2009).
Boucher v. Shaw
Thelma Boucher worked for The Castaways, a Nevada resort. The Castaways filed for bankruptcy and eventually ceased operations. When Boucher’s employment ended, The Castaways allegedly did not pay her certain wages she claimed were due her. She and two other former employees filed a class action lawsuit to recover those wages under Nevada law and the Fair Labor Standards Act.
But Boucher did not sue The Castaways, presumably because it was bankrupt. Instead, she asserted her claim against three of The Castaways’ senior managers: Dan Shaw, the Chairman and Chief Executive Officer of The Castaways at the time the plaintiffs were discharged; Michael Villamor, responsible for labor and employment matters; and James Van Woerkom, Chief Financial Officer. Shaw and Villamor owned The Castaways’ shares, but Van Woerkom did not.
The managers filed motions to dismiss, which the Nevada district court granted. On appeal, the Ninth Circuit affirmed the dismissal of claims under Nevada law, based on the Nevada Supreme Court’s response to certified questions. So, individuals cannot be held liable under Nevada’s wage and hour laws, either.
The court of appeals disagreed with the district court’s dismissal of the plaintiffs’ claims under the Act. The court’s analysis turned on the Act’s definition of “employer,” the entity responsible for compliance with the Act. The Act itself defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee . . . .” 29 U.S.C. § 203(d). The courts have held this definition is broader than the common law understanding of “employer.” To find an “employer” relationship under the Act, the court looks at the “economic reality” of the relationship. Unlike California law, individuals who merely exercise “economic control” over the relationship, or who control the relationship’s “nature and structure” may qualify as an employer.
The Ninth Circuit has held in a number of cases that individuals may be personally liable as “employers” under the Act. In Boucher, though, the plaintiffs alleged little more than the three defendants’ positions and stock ownership. Unlike Shaw and Villamor, Van Woerkom did not hold any ownership interest in The Castaways. But the court of appeals decided that the plaintiffs’ allegations were sufficient to survive a motion to dismiss, even against Van Woerkom.
The court of appeals’ opinion addressed the managers’ argument that The Castaways’ bankruptcy shielded them from liability as well. The court noted it had never decided whether a corporate employer’s bankruptcy affects individual liability for wages under the Act. However, the court had no trouble deciding that the corporation’s bankruptcy had no effect on the lawsuit against the individual managers. The court’s primary rationale was that the managers were independently liable under the Act and, therefore, the claims were not related to the bankruptcy estate.
Should California Managers Fear Boucher?
As the court noted in Boucher, individual liability under the Fair Labor Standards Act is not a novel proposition. As stated, employees overwhelmingly prefer to sue under California law, even though their choice of defendant usually is limited to the corporate employer. There are a number of reasons why. For example, the Act’s test for who is “exempt” from overtime law is less onerous for employers than its California analog. The Act does not mandate meal or rest periods, or prohibit “use it or lose it” vacation policies. Class actions under the Act are “opt-in” rather than “opt-out.” And, the Act does not provide for the daunting smorgasbord of penalties that can turn a wage-hour claim for a few dollars into a financial bonanza. Finally, California plaintiff attorneys often prefer the state court forum to federal court.
But the court’s holding in Boucher, that managers may be held liable for unpaid wages despite the corporate employer’s bankruptcy, is relevant to these troubled economic times. The court of appeals has shone a light on a path to potential alternative sources of funds. Therefore, if the Act provides a remedy for the claimed violations, employees may choose to assert Fair Labor Standards Act claims against senior managers rather than forego suing an insolvent employer.