When an employer does not pay an employee for work, the employer is liable for the unpaid wages. But a company’s owners, directors, officers, and managing agents may be personally liable for wage and hour violations as well. Lower-level managers and supervisors may also incur personal liability in some circumstances.
Labor Code Section 558.1
Labor Code section 558.1 permits employees to bring certain actions against “persons acting on behalf of [their] employer.” Employees may assert against these “persons” a variety of wage-hour claims. These include Wage Order or Labor Code sections governing timely payment of discharged employees, meal, rest, and recovery periods, itemized wage statements, unpaid minimum wage and overtime, and the reimbursement of employment related expenses.
“Employer” is defined in the Labor Code to include “an owner, director, officer, or managing agent of the employer.” So, employees may bring wage and hour claims against the owners, directors, officers, or managing agents of the business.
A managing agent is an employee who exercises substantial discretionary authority over decisions that ultimately determine a company’s policies. A manager who merely has authority to hire or fire employees is not a managing agent. However, a manager who exercises substantial independent authority and judgment, and whose decisions affect company policies may be. The key issue in making that determination is how much discretion the manager possesses, and whether their decisions ultimately determine corporate policy.
Other Employees Who May Be “Employers”
Labor Code section 558.1 does not apply to lower-level managers and supervisors. However, those individuals may be liable for certain wage and hour violations under case law and the Wage Orders. In Martinez v. Combs, the California Supreme Court adopted a broad definition of employer contained in the Wage Orders. Specifically, the court held that “[to employ] means: (a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit work, or (c) to engage, thereby creating a common law employment relationship.” As a result, “employer” can include a broader set of defendants than the “corporation” or other business entity, such as a subsidiary.
The Labor Commissioner can seek to impose criminal liability on an employer, including an owner, director, or managing agent, for failing to comply with a “stop order.” A “stop order” is an administrative order to cease work due to serious wage and hour violations. Individuals can be charged with a misdemeanor punishable by imprisonment in county jail for up to 60 days and/or by a fine of up to $10,000.
Personal Liability under Federal Law
The federal Fair Labor Standards Act (FLSA) also allows for corporate agents and certain employees to be held personally liable for minimum wage, overtime pay, and child labor violations. Federal courts will apply an “economic realities” test, which requires the individual to exercise significant control over the company’s operations.
To make this determination, courts consider whether the individuals have the power to hire and fire employees, determine salaries, are responsible for maintaining employment records, and control other significant aspects of the company’s day-to-day functions. In Boucher v. Shaw the Ninth Circuit ruled that a CEO, CFO, and other managers could be held liable for the corporation’s failure to pay wages under the FLSA because the officers had “control and custody of the plaintiff class, their employment, and their place of employment.” However, in Alvarez Perez v. Danford-Orlando Kennel Club, Inc., the Eleventh Circuit found a corporate officer who was only at the actual workplace once a year was not an “employer” under the FLSA.
Employer Required to Indemnify
Although laws allow for an individual employee’s personal liability under federal and state law, California managers rarely will pay out of pocket for wage and hour violations. California law requires employers to indemnify employees for necessarily incurred expenses, which can include legal expenses generated by claims against the individual. Indemnification is required when an employee is working within the course and scope of employment, carrying out the employer’s directions. So, when a manager carries out company policy, the employer is responsible for reimbursing that manager for legal costs and even a judgment.
That said, management risks liability when they take actions that are outside the course of employment. And indemnification may not be possible if the employer is insolvent or otherwise unable to pay.
Bankruptcy/Insolvency of Employer
Laws expanding liability allow plaintiffs to recover awards from those who may be able to pay when the business entity-employer is insolvent or undercapitalized. For example, if an employer files for bankruptcy, an employee may try to recover their unpaid wages from alternative sources, such as managing agents. Although employers are required to indemnify employees, managers and supervisors may have to seek indemnification in the bankruptcy proceedings.
So-called “sue your boss” laws provide tangible incentives for managers to ensure the employing entity complies with all the relevant minimum wage, overtime, and other salary and benefit laws. Those who implement wage and hour policies should seek training regarding the complex web of wage and hour obligations. These would-be “employers” also should review their employing entities’ by-laws and insurance policies to determine if owners, directors, officers, and managing agents are appropriately protected and if additional coverage is needed. Employing entities also must foster a workplace environment that prioritizes compliance with employment law, which includes policy development and management training.