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Court of Appeal: Individual Employees May Be Held Liable for Some Penalties and Attorney’s Fees in Wage-Hour Cases

by D. Gregory Valenza | | September 29, 2018

Well, looks like a Court of Appeal (in Atempa v. Pedrezzani (here)) has decided that any person “acting on behalf of an employer” who violates or causes a violation of the state’s applicable overtime laws may be held personally liable for civil penalties under Labor Code section 558.  And any person  “acting either individually or as an officer, agent, or employee of another person” who pays or causes to pay an employee less than the state’s applicable minimum wage may be subjected to civil penalties under Labor Code section 1197.1.  

No big deal.  That’s just personal liability for penalties based on any violation of the Wage Orders, minimum wage law, overtime, and more.  And the employee seeking these penalties must use PAGA to get them. So, PAGA lets the employee seek “representative” penalties not merely for him/herself, but also on behalf of others. Then PAGA allows for an award of attorney’s fees and costs.  Those may be imposed against individuals too.  

Nothing to see here. You’re thinking: who is a “person?” Maybe you’re thinking: “I mean, I work for a big company and there’s no way that *I* could be held liable, right?  RIGHT?”  I can’t say “right.” Anyone “who causes” a violation of section 558 or 1197.1 might be liable for penalties and attorney’s fees.  Could that be you?  I don’t know. It depends on your role with respect to setting and administering wage policy in your organizations.  Here’s what the Court said:

the Legislature has decided that both the employer and any “other person” who causes a violation of the overtime pay or minimum wage laws are subject to specified civil penalties. (§§ 558(a) [overtime], 1197.1(a) [minimum wage].) Neither of these statutes mentions the business structure of the employer, the benefits or protections of the corporate form, or any potential reason or basis for disregarding the corporate form. To the contrary, as we explain, the business structure of the employer is irrelevant; if there is evidence and a finding that a party other than the employer “violates, or causes to be violated” the overtime laws (§ 558(a)) or “pays or causes to be paid to any employee” less than minimum wage (§ 1197.1(a)), then that party is liable for certain civil penalties regardless of the identity or business structure of the employer. 

(emphasis added)

How did this happen?  It started when a couple of former dishwashers sued a small Southern California restaurant and its owner for wage and hour violations.  They obtained a judgment for unpaid wages against the restaurant – their employer.  And then they obtained an award of penalties against both the restaurant and the owner.  Oh yeah, and then the trial court awarded over $300,000 in attorney’s fees, and that’s before he lost this appeal.

The restaurant employer went bankrupt.  So that left the claims against the owner.  He argued, however, that only an employer can be liable for wages, and the only employer was the corporation. He also argued there was no evidence that he was an “alter ego,” or that the employees had any legal basis to pierce the corporate veil. Therefore, because he wasn’t personally liable for the wages allegedly due, how could he be liable for the penalties that flow from alleged failure to pay the wages?   Makes sense, right?

No. No it didn’t.  The Court of Appeal agreed that owner Pedrezzani was not an alter ego, and that there was NO basis for holding him responsible for the unpaid wages that the trial court held were due.  But the Court also found that the penalty statutes aren’t limited to the employer who fails to pay the wages owed.  Rather, the penalty laws extend to individuals who may not be the employer, as long as they’re sufficiently responsible for the violations that occurred. 

First, the good news: The Court of Appeal reaffirmed that unpaid wages are the responsibility of the “employer” and not individual managers or “other persons” acting on behalf of the employer.  There may be times when individuals are held liable for lost wages, but that will require proof that the individual is the “alter ego” of the employer, or has committed some other wrongdoing in addition to merely performing his or her job functions.

As a general rule, a corporate employer’s officers/agents are not personally liable for the employer’s failure to pay employees contractual or statutory wages, overtime compensation, vested vacation time, or unreimbursed business expenses. (See §§ 201-204, 210, 227.3, 510, 1194 (as discussed in the text, ante), 1194.2, 2802.)  

On the issue of penalties, though, the Court reviewed the statutes quoted above, and relevant analogous laws. The court decided that even though individuals cannot be held liable for unpaid wages, they can be liable for penalties because the wages were not properly paid:

Pedrazzani’s individual liability did not result from a corporate debt or obligation based on what Pedrazzani describes as “disregarding the corporate form” under the common law. Pedrazzani’s liability resulted from a sufficient evidentiary showing (which Pedrazzani does not challenge on appeal) that he qualified as an “other person” liable for the civil penalties under the unambiguous language of the two statutes. 

The Court also had to find that PAGA permitted proceeding against an individual, because an employee cannot sue for penalties under Sections 558 or 1197.1 directly. 

under section 2699, subdivision (a), “an ‘aggrieved employee’ may bring a civil action . . . to recover civil penalties for Labor Code violations.” (Arias, at p. 980; accord, Thurman, supra, 203 Cal.App.4th at p. 1126 [“Section 2699, subdivision (a) . . . ‘permits aggrieved employees to recover civil penalties that previously could be collected only by LWDA’ “].) 

Now that that’s out of the way, what does it take to be an individual held liable?  The Court does not answer that question. The fact-finder will have to determine that the individual was responsible for the violation.  Does that mean a payroll manager?  The VP of HR?  The Compensation Specialist?  What about the Payroll Service Provider when they make mis-calculations?  Could be. We’ll see what future litigation brings.  Heyyyyy but what about an employment lawyer who provides bad advice to an employer? NO WAY.  I mean, that’s my position and I’m sticking to it. 

Anyway, this case is in the books.  To be honest, I am not sure the Court got it wrong, given the expansive statutory language.

So, what could this mean as a practical matter?  Here are a few scenarios that may or may not be realistic:

  • Disputes between employer and managers hit with penalties,
  • Disputes over compensation policies due to fear of being hit with penalties.
  • Managers refusing to implement policy changes that could give rise to personal liability
  • Managers advocating policies that they believe protect them from personal liability
  • Managers questioning their prior decisions to classify workers as exempt
  • Questions about whether companies can indemnify employees for wage and hour penalties and whether they can refuse to do so
  • Separate counsel for individuals and organizations sued in the same lawsuit due to conflicts of interest, resulting in much higher defense costs
  • Increased whistleblower claims by payroll and HR who challenge compensation issues that could give rise to their own personal liability for penalties
  • Talented compensation managers and employees getting out of the jobs that result in wage and hour administration 
  • Payroll service companies insisting on indemnification if they are hit with penalties.
  • Employment law counsel documenting every piece of advice with qualifications and caveats and refusing to help with legally dicey decisions such as “borderline” exempt status?

Hey, I’m an optimist.  I bet when a few VPs of HR or CFOs at big tech companies or donors to a certain political party get hit, maybe someone will pay attention and lobby to amend this law. Until then, though, consult with employment law counsel about the ripple effects of this decision, and what concrete steps your organization should or must do in anticipation of personal liability for wage and hour administration.

Again, the decision is Atempa v. Pedrezzani and it is here


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