In any given week, approximately 25 percent of workers do not receive all of the wages that are owed to them.[1] As much as $50 billion per year in wages go unpaid nationally, with an estimated $26 million per week unpaid in Los Angeles County alone.[2]
Those workers who are brave enough to pursue their rights in court often find themselves with a defendant that is unable to pay what it owes. Sometimes that is because the employer is a corporation that has gone out of business and has no funds. In such cases, it is important to consider whether the workers can pierce the corporate veil and sue the individuals who created the corporation.
Specifically, under what is called the alter ego doctrine, when the corporate form is used to avoid paying wages, courts may ignore the corporate entity and deem the corporation’s acts to be those of the persons or organizations who actually control the corporation. In most cases, that means the owners.
The seminal case on alter ego under California law is Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523. There, the court explained the basic concepts underlying the doctrine as follows:
►Ordinarily, a corporation is regarded as a legal entity, separate and distinct from its stockholders, officers and directors, with separate and distinct liabilities and obligations.
►A corporate identity may be disregarded—the “corporate veil” pierced—where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation.
►Under the alter ego doctrine when the corporate form is used for some wrongful purpose, courts may ignore the corporate entity and deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners.
Sonora indicates that plaintiffs must meet two requirements in order to invoke the alter ego doctrine and pierce the corporate veil:
(1) There must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist; and
(2) There must be an inequitable result if the acts in question are treated as those of the corporation alone.
In wage theft cases, is it normally not difficult to prove an unfair result where the corporate form is used to insulate individuals from liability. Therefore, in such cases it is usually the first requirement of the alter ego doctrine that is challenging to meet.
Applying that requirement depends upon the specific facts of each case. However, Sonora explains that there are certain factors that courts should considered in applying the alter ego doctrine. These include (1) the commingling of funds and other assets, (2) the holding out by one entity that it is liable for the debts of the other, (3) identical equitable ownership in the two entities, (4) use of the same offices and employees, (5) use of one entity as a mere shell or conduit for the affairs of the other, (6) inadequate capitalization, (7) disregard of corporate formalities, (8) lack of segregation of corporate records, and (9) identical directors and officers. 83 Cal.App.4th at 538-539. “No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied.” Id., at 539.
Critically, the alter ego doctrine does not include a requirement that the business at issue was set up for the purpose of committing fraud or other misdeeds. See Turman v. Superior Court of Orange County (2017) 17 Cal.App.5th 969, 980–981. In that case, the trial court had noted that business at issue was “a real business with real purpose and assets and not a sham corporate entity formed for the purpose of committing a fraud or other misdeeds.” The court of appeal concluded that that statements suggested “a misunderstanding of the applicable law.”
Accordingly, under California law the only requirements for the alter ego doctrine to apply are those set forth in Sonora. Victims of wage theft who cannot recover their unpaid wages from a corporate entity should be sure to consider whether that doctrine applies to their situation, thus allowing them to sue the people or companies that are behind the corporate entity.
If you have questions about your wages and who you can sue under California law, please feel free to contact the attorneys at Hunter Pyle Law for a free and confidential intake process. We can be reached at hunterpylelaw.com, inquire@hunterpylelaw.com, or (510) 444-4400.
[1] Bernhardt, et al., Broken Laws, Unprotected Workers: Violations of Employment and Labor Laws in America’s Cities (Broken Laws) (2009) p.2 <http://www.nelp.org/content/uploads/.
[2] Broken Laws, supra, fn. 2.