Individual Liability under California Labor Code section 558.1: Some guidance from the courts of appeal

Until relatively recently, an employee could not recover damages for unpaid wages and other wage and hour violations from an individual owner or officer of the employer unless the employee could prove some other legal basis for liability such as alter ego liability. However, alter ego liability is generally difficult to prove and has been described as an extreme remedy that is sparingly used.

As a result, even if an employee obtained a judgment against a corporate employer, it was often difficult to collect that award for a number of reasons: the employer could have “hidden their cash assets, declared bankruptcy, or otherwise become judgment-proof.” See Assem. Com. on Judiciary, Analysis of Sen. Bill No. 588 (2015-2016 Reg. Sess.) as amended July 1, 2015, p. 4; accord, Sen. Com. on Labor & Industrial Relations, Analysis of Sen. Bill No. 588 (2015-2016 Reg. Sess.) Apr. 29, 2015, pp. 5-6 [“the vast majority of wage theft victims received nothing, and those that received anything received little of what they were legally due”].

In response to this problem, the California Legislature enacted Labor Code section 558.1 in order to expand liability for wage and hour violations and to “discourage business owners from rolling up their operations and walking away from their debts to workers and starting a new company.” See Sen. Com. on Judiciary, Analysis of Sen. Bill No. 588 (2015-2016 Reg. Sess.) Apr. 20, 2015, p. 12; see also Voris v. Lampert (2019) 7 Cal.5th 1141, 1161 [section 558.1 “targets individual officers who are involved in the failure to pay wages”].

Section 558.1 has two provisions that are relevant here. First, section (a) provides as follows:

Any employer or other person acting on behalf of an employer, who violates, or causes to be violated, any provision regulating minimum wages or hours and days of work in any order of the Industrial Welfare Commission, or violates, or causes to be violated, Sections 203, 226, 226.7, 1193.6, 1194, or 2802, may be held liable as the employer for such violation.

The term “other person acting on behalf of an employer” is defined in section (b) as follows:

For purposes of this section, the term ‘other person acting on behalf of an employer’ is limited to a natural person who is an owner, director, officer, or managing agent of the employer, and the term ‘managing agent’ has the same meaning as in subdivision (b) of Section 3294 of the Civil Code.

Section 3294, subdivision (b), of the Civil Code in turn provides an employer shall not be liable for punitive damages based on acts of an employee unless there has been “advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice” on the part of “an officer, director, or managing agent of the corporation.” Courts have defined a “managing agent” pursuant to this statute to be an employee who “exercises substantial discretionary authority over decisions that ultimately determine corporate policy.” White v. Ultramar, Inc. (1999) 21 Cal.4th 563, 573.

In the last year, two decisions from the California Courts of Appeal have helped to further shape the meaning of “other person acting on behalf of an employer” as used in Section 558.1. Most recently, in Espinoza v. Hepta Run, Inc. (Jan. 19, 2022, No. B306292) 2022 WL 167770 the Second District Court of Appeal concluded that in order to “cause” a violation of the Labor Code and therefore to come within the ambit of Section 558.1, an individual must have engaged in some affirmative action beyond his or her status as an owner, officer or director of the corporation. The court noted, however, that that “does not necessarily mean the individual must have had involvement in the day-to-day operations of the company, nor is it required the individual authored the challenged employment policies or specifically approved their implementation.” Rather, to be held personally liable, he or she must have had some oversight of the company’s operations or some influence on corporate policy that resulted in Labor Code violations.

Under this test, the individual defendant in Espinoza was clearly liable under Section 558.1. Among other things, he was the sole owner and president of the corporate employer. He also admitted that he had approved the policy that allegedly violated various provisions of the Labor Code.

The Espinoza court’s reading of section 558.1 is therefore broader than the gloss provided by the Fourth District Court of Appeal in Usher v. White (2021) 64 Cal.App.5th 883, 895, There, the court considered the question of whether personal liability could be imposed on a corporate officer who assisted with administrative and banking tasks but had no role in day-to-day operations or employment policies. The court relied mainly on federal district court decisions in finding that to be held individually liable, the officer must have been “ ‘personally involved’ in the alleged violations” or “engaged in ‘individual wrongdoing’ ” Id. at pp. 895-896.

“[T]o be held liable under section 558.1, an ‘owner’… must either have been personally involved in the purported violation of one or more of the enumerated provisions; or, absent such personal involvement, had sufficient participation in the activities of the employer, including, for example, over those responsible for the alleged wage and hour violations, such that the ‘owner’ may be deemed to have contributed to, and thus for purposes of this statute, ‘cause[d]’ a violation.” Id. at pp. 896-897.

Turning to the case before it, the Usher court held the individual defendant was not liable because the undisputed facts showed she had not participated in the relevant employment decisions.

Individual liability can mean the difference between being able to collect on a judgment for unpaid wages and being left with nothing. If you have questions about your wages, please feel free to contact the attorneys at Hunter Pyle Law. We can be reached at inquire@hunterpylelaw.com or at (510) 444-4400.

Independent Contractor or Employee? Why It Matters

In 2018, the California Supreme Court adopted the ABC Test for determining whether workers are independent contractors in the seminal case of Dynamex Operations W., Inc. v. Superior Court (2018) 4 Cal.5th 903. That test, generally speaking, is more favorable for workers because it requires hiring entities to prove that a worker (A) is free from the control and direction of the hirer; (B) performs work outside of the hiring entity’s business; and (C) is engaged in an independently established trade, occupation, or business. Otherwise the worker must be classified as an employee.

In adopting the ABC Test, the Dynamex Court noted that misclassification of workers as independent contractors is a very serious problem that, if unchecked, would “depriv[e] federal and state governments of billions of dollars in tax revenue and millions of workers of the labor law protections to which they are entitled.” That statement could not be more true, and this blog post explores just why that is so.

Misclassification deprives workers of their fundamental rights

As a preliminary matter, independent contractors (ICs) are not subject to the same wage and hour laws as employees (EEs). For example, ICs are not guaranteed a minimum wage, overtime, or meal and rest periods. Similarly, ICs do not have the right to a workplace that is free from harassment and discrimination. Nor do ICs have the right a safe workplace, or to form a union.

ICs also generally do not qualify for workers’ compensation if they get hurt on the job, or unemployment insurance if they get laid off.

Misclassification harms women and people of color

Furthermore, misclassification disproportionately harms women and people of color. Think about the industries where misclassification is most common: construction, home health care, shipping and delivery, driver services (like Uber and Lyft), and janitors. Those are also the industries in which women and people of color are disproportionately represented. According to one study, seven out of eight occupations in which misclassification is common are held mainly by women and people of color. See Alexander, Charlotte S., 2017, “Misclassification and Antidiscrimination: An Empirical Analysis,” Minn. Law Rev. 101, no. 3 (February 2017).

Misclassification shifts the burden to state and local governments

When companies convert EEs into ICs, they drastically reduce the amount of money that they have to pay by way of employment-based taxes. For example, employers are required to pay taxes that help to fund Social Security and Medicare. They also have to help pay for unemployment insurance and workers compensation. According to the Economic Policy Institute, these taxes and benefits “can add as much as 30% or more to a worker’s total costs.” See “Misclassification, the ABC test, and employee status” (June 16, 2021, Lynn Rhinehart, et al.

Companies that utilize ICs do not pay into the social safety net in this same manner. As a result, they effectively shift the cost of these important benefit programs to the taxpayers.

The misclassification ripple effect

Finally, misclassification makes it harder for companies that want to do the right thing and pay their employees a living wage. When a company misclassifies an employee as an IC, it gains an unfair advantage over its competitors. Even though it is illegal to do so, those companies are able to slash their overhead. This forces the companies competing with them to also reduce their costs. As a result, misclassification effectively pressures other businesses to follow suit.

The ABC Test and the future fight against misclassification

California is not alone: As of January 2022, many states have adopted the ABC Test. At the same time, companies like Uber, Lyft, and DoorDash have done everything they can to try and avoid treating workers as EEs under the law. This includes ballot initiatives like California’s Proposition 22, which sought to exclude app-based drivers from California’s wage and hour laws. The fight is therefore far from over

If you think that you may be misclassified as an Independent Contractor, please feel free to contact the experienced attorneys at Hunter Pyle Law for a free and confidential intake process. We can be reached at inquire@hunterpylelaw.com, or at (510) 444-4400.

Is Your Employer Paying You Properly for Missed Meal and Rest Breaks? Only If it Includes Nondiscretionary Pay in Your Regular Rate of Compensation.

The California Supreme Court has clarified that employers must include both hourly wages and all nondiscretionary payments when calculating the regular rate of pay for the purposes of compensating employees for missed meal and rest periods. See Ferra v. Loews Hollywood Hotel, LLC (2021) 11 Cal.5th 858. The Court further held that this decision applies retroactively. Read on to see whether your employer might have been paying you the wrong rate for your missed meal and rest periods.

In Ferra, the issue was whether the defendant had properly calculated the amount of pay that was owed to employees who did not receive proper meal or rest periods. Under California law, when an employer does not provide an employee with a meal or rest period, as required by law, the employer must pay the employee one additional hour of pay “at the employee’s regular rate of compensation.” See Cal Lab. Code § 226.7(c). Loews Hollywood Hotel interpreted that phrase narrowly, and paid its employees for missed meal and rest periods according to their base hourly rate. It did not include any “nondiscretionary pay” in that calculation.

On review, the California Supreme Court noted that “nondiscretionary pay” included pay that was owed to an employee pursuant to a contract, agreement, or promise, so long as it was not determined at the sole discretion of the employer. In other words, where certain types of pay must be made in a certain amount if the employee accomplishes certain things, they are nondiscretionary under the law. Typically, nondiscretionary pay includes payments for meeting certain goals, such as attendance, timeliness, or productivity.

The Court then considered the history of Section 226.7, and concluded that “regular rate of pay” in that statute had the same meaning as the term “regular rate of pay” in Section 510(a). Accordingly, it includes not only hourly pay but also any nondiscretionary payments for work performed by the employee. This is consistent with the general proposition that California’s labor laws are to be liberally construed in favor of workers. See, e.g., Alvarado v. Dart Container Corp. (2018) 4 Cal.5th 542. 562.

Do you receive any type of nondiscretionary payments above and beyond your hourly rate, such as attendance or productivity bonuses? If so, your employer may be failing to pay you properly for your missed meal and rest periods. Please feel free to call the experienced attorneys at Hunter Pyle Law to find out if you may have a case. We can be reached at (510) 444-4400 or at inquire@hunterpylelaw.com.

A Win for Workers in the Fourth District Court of Appeal

The attorneys at Hunter Pyle Law (HPL), along with co-counsel Feinberg, Jackson, Worthman & Wasow (FJWW) recently received a favorable decision from the Fourth District Court of Appeal in a case called Uribe v. Crown Building Maintenence Co. (September 30, 2021, Case No. G057836). HPL and FJWW represent Isabel Garibay, a worker who intervened in the Uribe case because the defendant in that case was attempting to engineer a “reverse auction”-a strategic move whereby a defendant tries to settle the case by appealing to the lowest bidder. HPL and FJWW were able to block that settlement, returning the case to the trial court where they will seek justice and victory on behalf of the workers.

The underlying facts in Uribe are as follows. In 2015, HPL and FJWW filed a class action in Alameda County called Gama v. Able Services, et al. The Plaintiff in that case sought to represent a class of 20,000 janitors who were forced to use their cell phones for work-related purposes. (As a point of reference regarding the value of the case, HPL and FJWW had certified a class and subsequently resolved a similar case against another janitorial company for over $5 million.)

In 2016, Josue Uribe filed his lawsuit against the same defendants. Mr. Uribe’s case was not a class action; rather, it was a representative action under California’s Private Attorneys General Act (“PAGA”). Nor was it a cell phone case. Rather, Mr. Uribe’s case was originally about reimbursements for washing uniforms. (Mr. Uribe’s subsequent court filings seem to indicate that he later valued his uniform clam at zero dollars.)

HPL and FJWW litigated Gama aggressively, and were prepared to take the case to trial if it did not settle. However, once the defendants learned of this fact, they began to try to convince the lawyer who represented Mr. Uribe to settle the claims in the Gama case. Unfortunately, Mr. Uribe’s lawyer agreed to do that. He then tried to amend his case so that it included the claims at issue in Gama. Worst of all, Mr. Uribe’s attorney agreed to settle the janitor’s claims worth tens of millions of dollars for $370,000.

HPL and FJWW intervened in the Uribe case and tried to block the settlement at the trial court. However, they were unsuccessful in that regard, and were forced to file an  appeal. Fortunately, they prevailed before the Fourth District Court of Appeal, which reversed the judgment.

The appellate court began its analysis by noting that Ms. Garibay (the worker represented by HPL and FJWW) had standing to bring her appeal. Ms. Garibay had intervened in the Uribe case for the purpose of opposing the settlement, but the Fourth District noted that that was not enough. Instead, the court focused on the fact that Ms. Garibay’s case predated Mr. Uribe’s and that she had invested substantial time and resources to pursuing her PAGA claim.

The appellate court then adopted wholesale the argument that Ms. Garibay had made in her briefs: that Mr. Uribe had not properly exhausted his remedies prior to amending his case to add a PAGA claim based on the failure to reimburse for cellular phone expenses. This argument had fallen on deaf ears at the trial court, but the court of appeal found it to be compelling, reaching the following conclusion:

Having no basis to sue on that ground, any settlement Uribe reached with Crown could not include settlement of PAGA claims for unreimbursed cell phone costs, and the trial court could not enter judgment confirming such a settlement.

The court of appeal noted that the settlement provided that if the court did not approve it “as provided herein” it was null and void. The court then found that the settlement could not stand because it was not approved as written. The case will therefore return to the trial court, where HPL and FJWW will continue to fight on behalf of the 20,000 or so workers who are affected by this case.

By a strange twist of fate, on September 30 2021, the same date that Uribe was decided, the Second District Court of Appeal reached the opposite conclusion in the case of Turrieta v. Lyft (September 30, 2021, Case No. B304701). There, the court concluded that the objectors to a PAGA settlement did not have standing to appeal from a judgment approving that settlement. The attorneys in Turrieta have indicated that they are going to seek review at the California Supreme Court. Check back here for future developments as that effort continues.

If you have questions about your rights in the workplace, please feel free to contact the attorneys at Hunter Pyle Law. We can be reached at (510) 444-4400, at inquire@hunterpylelaw.com, or at www.hunterpylelaw.com.

PAGA and Manageability: Some Lessons Learned from Wesson v. Staples

On September 9, 2021, in Wesson v. Staples the Office Superstore, LLC (Cal. Ct. App., Sept. 9, 2021, No. B302988) 2021 WL 4099059, Division 4 of the Second District Court of Appeal addressed an important question of first impression: whether trial courts have the authority to ensure that claims brought under California’s Private Attorneys General Act (“PAGA”) will be manageable at trial. The plaintiff in Wesson claimed that the Los Angeles Superior Court had no such authority, and that all that he was required to produce was his pan to prove his prima facie case. (A prima facie case means sufficient evidence that, if proven, would support a verdict in the plaintiff’s favor.)

In response, Staples, the defendant, argued that the trial court had to consider its affirmative defenses to the plaintiff’s claims, And, if those affirmative defenses involved individualized proof as to each class member, then the case was “unmanageable” and should be dismissed.

The trial court agreed with Staples, and ruled that it did have the authority to consider manageability. Furthermore, it found that the plaintiff had not shown that the PAGA claim was manageable and dismissed the case. The court of appeal affirmed. Absent review by the California Supreme Court, Wesson is likely to have a significant impact on PAGA cases going forward. This post explores what happened in that case and how it is likely to play out.

First, some background. In Wesson, the plaintiff had worked for Staples the Office Superstore, LLC (Staples) as a store general manager (GM). He claimed that Staples had illegally misclassified him as an exempt employee. Mr. Wesson sued Staples, asserting, among other things, a representative claim under the Private Attorneys General Act of 2004 (PAGA) (Lab. Code, § 2698 et seq.). He sought to bring claims on behalf of himself as well as 345 other current and former Staples GMs in California.

After several years of litigation, Mr. Wesson filed a motion to certify a class based on the misclassification claims. The trial court denied that motion, finding that important questions regarding how the GMs had spent their time at work could not be resolved on a classwide basis.

Staples then filed a motion to strike the plaintiff’s PAGA claim. Staples argued that that claim was “unmanageable” because of the nature of its affirmative defense-that it would have to elicit individualized proof as to each of the 346 GMs.

In response, Mr. Wesson contended that the trial court did not have the authority to determine whether PAGA claims were manageable. Although the trial court invited him to submit a trial plan showing that the PAGA claim was manageable, Mr. Wesson declined to do so. Instead, he argued that all that he had to do was to prove his prima facie case using common proof. The trial court then struck (meaning dismissed) the PAGA claim.

The court of appeal agreed, holding that courts have the inherent authority to ensure that a PAGA claims will be manageable at trial. That includes the authority to strike the PAGA claim, if necessary. The court further noted that PAGA claims may present more significant manageability issues than class actions for the following reasons:

PAGA claims do not require a showing that common questions predominate over individual ones.

PAGA claims do not require a showing of a uniform policy.

PAGA claims can cover a wide variety of employees and involve different kinds of violations.

Turning to the facts of the case, the court of appeal found that there was a large amount of variation from store to store in terms of how GMs performed their job duties. Surprisingly Mr. Wesson agreed that resolution of his claims on a classwide basis would require an analysis of how each GM spent his time. He also apparently agreed with Staples’ estimate that it would take eight years to try the case. Based on these facts, the court of appeal had no difficulty in finding that the trial court had not abused its discretion in striking the PAGA claims as unmanageable.

Defendants in PAGA claims will no doubt point to Wesson and argue that their cases too are unmanageable. But courts should not read Wesson too broadly. Among other things, in that case:

1. Misclassification claims that turn on the workers’ job duties can be inherently fact specific, requiring individualized inquiries as to each person; and

2. The plaintiff in Wesson refused to provide a trial plan showing how his PAGA claim could be efficiently managed; and

3. The plaintiff apparently conceded that the trial would last eight years.

For these reasons, Wesson will have little or no impact on most PAGA cases. However, Wesson underscores the importance of ensuring that plaintiffs (1) have a trial plan that addresses all of the issues in the case, including any affirmative defenses, and (2) structure the case in a manner that demonstrates to the trial court that it can be resolved in a reasonable length of time.

The workers rights attorneys at Hunter Pyle Law have handles PAGA and class cases throughout California. If you have questions about your rights in the workplace, please feel free to contact us in order to utilize our free and confidential intake process. We can be reached at inquire@hunterpylelaw.com or at (510) 444-4400.

Minimum Wage, Public Employees, and the University of California

The University of California (referred to in this post as “the Regents”) employs more than two hundred thousand people. Determining which laws apply to the Regents can be challenging. Gomez v. Regents (2021) 63 Cal.App.5th 386 provides some guidance with respect to California’s wage and hour laws.

In Gomez, the plaintiff challenged the Regents’ policy and practice of rounding time punches (usually down) and automatically deducting 30 minutes for meal periods regardless of whether the employees actually took them. The issue before the court was whether the Regents were subject to California’s minimum wage laws. The superior court held that they were not, and dismissed the case. The court of appeal affirmed.

The court of appeal began its analysis by noting that California’s minimum wage requirements apply to employees of the State and its political subdivisions, including cities, counties, and special districts. However, the court concluded that the Regents is not a political subdivision. Rather, it is a public trust. See People v. Lofchie (2014) 229 Cal.App.4th 240, 254.

The Gomez court then distinguished the Regents from other types of political subdivisions in California. For example, in Marquez v. City of Long Beach (2019) 32 Cal.App.5th 552, the Second District Court of Appeal had concluded that minimum wage laws applied to California Charter cities, because:

[L]legislation setting a statewide minimum wage, generally applicable to both private and public employees, addresses the state’s interest in protecting the health and welfare of workers by ensuring they can afford the necessities of life for themselves and their families.

However, the Gomez court noted that the Regents are not a charter city, and that there were no allegations that the Regents had set hourly wages below the state minimum wage. Accordingly, it concluded that Marquez did not apply.

The Gomez court also addressed Sheppard v. North Orange County Regional Occupational Program (2010) 191 Cal.App.4th 289. In that case, the court of appeal concluded that minimum wage laws applied to a regional occupational program established by a public school district. Unlike the Regents, such entities are political subdivisions because they were established under Education Code section 52301.

Finally, the Gomez court concluded that the Private Attorneys General Act (“PAGA”) did not apply, because the Regents could not be considered to be violators under that statute. See Labor Code § 2699(c).

Accordingly, California’s minimum wage laws do not apply to employees of the Regents. However, all is not lost. The Fair Labor Standards Act, or FLSA, applies to public employees.  FLSA is a federal law dating back over half a century which establishes certain minimum requirements for employees’ hours of work, wages, premium overtime and payroll records. To be clear, the federal minimum wage is much lower than California’s. Furthermore, unlike California law, the FLSA does not require employers to provide meal or rest breaks.  Nor does it require that employers pay overtime if employees work more than eight hours in a day.  (California law does.  See Labor Code § 510.)

The attorneys at Hunter Pyle Law represent both public and private employees in individual and class actions throughout California.  If you have a question about your situation at work, please feel free to contact us for a confidential initial intake.  We can be reached at (510) 444-4400 or inquire@hunterpylelaw.com.

My Company Went Out of Business and Owes Me Wages: Successor Liability in California (2021)

Workers who are the victim of wage theft can bring claims either in court or at the Labor Commissioner to recover their unpaid wages, damages, and penalties. Those claims, if successful, result in a judgment against the workers’ employer. But what if the employer goes out of business to avoid liability, and reforms a short time later under a new name? This type of shenanigans can make it very difficult for the workers to recover the money that they are owed, even if they have a final judgment against their employer that cannot be appealed.

In an effort to remedy this situation, California has enacted an important new law that allows workers to recover unpaid wages from successor companies under certain circumstances. Labor Code section 200.3, effective January 1, 2021, applies to judgments for wages, damages, and penalties. It allows workers to sue successors where any of the following criteria are met:

(1) The successor uses substantially the same facilities or substantially the same workforce to offer substantially the same services as the judgment debtor.

(2) The successor has substantially the same owners or managers that control the labor relations as the judgment debtor.

(3) The successor employs as a managing agent any person who directly controlled the wages, hours, or working conditions of the affected workforce of the judgment debtor.

-or-

(4) The successor operates a business in the same industry and the business has an owner, partner, officer, or director who is an immediate family member of any owner, partner, officer, or director of the judgment debtor.

Importantly, workers need only show that one of those criteria is present in order to proceed under Section 200.3. Those criteria are very broad, and they are worth taking a closer look at.

For example, the first clause allows the transfer of liability to companies that use the same (or similar) buildings to provide the same services to their clients. It also applies to companies that use the same (or similar) workers.

The second clause allows the transfer of liability to companies that employ the individuals who controlled the labor relations at the previous company. The third clause would apply if one company had a manager who had also managed the workers at the company that owed the unpaid wages. And the fourth clause would apply to a business in the same industry that had an immediate family member as an owner, partner, etc.

Again, if workers can show that a company meets any of these criteria, they can hold that company liable for their unpaid wages even if their former employer no longer exists. That is a huge benefit to the workers who are trying to recover those wages.

At the time that Section 200.3 was passed, the Legislature also amended other existing laws to require that corporations, limited liability companies, and other businesses, inform the State as to whether any officer or any director, or, in the case of a limited liability company, any member or any manager, has an outstanding final judgment issued by the Division of Labor Standards Enforcement or a court of law, for the violation of any wage order or provision of the Labor Code. That data must be included in the statement of information that certain businesses must file with the California Secretary of State within 90 days of forming, and then once every year or two, depending on the type of the business.

Statements of information must be certified as true and correct, and are normally available on line. (See https://businesssearch.sos.ca.gov.) This new legislation therefore should make it much easier to determine whether the people behind California businesses have judgments for unpaid wages against them. If so, Section 200.3 makes it a lot easier for workers to pursue them for those unpaid wages.

If you have questions about your unpaid wages, feel free to contact the experienced wage and hour attorneys at Hunter Pyle Law for and make use of our free and confidential intake process. We can be reached at (510) 444-4400 or at inquire@hunterpylelaw.com.

Joint Employer Liability in California Wage and Hour Cases

Workers who sue for unpaid wages in California often find that their immediate employer has no money to pay them. Fortunately, California has a broad joint employer doctrine that allows workers to sue entities other than their immediate employers-including both businesses and individuals-for such wages. (more…)

Individual Liability for Wage and Hour Violations under California Law

This blog post explores several California statutes that allow workers to sue individuals for unpaid wages and related claims. That scenario normally arises when workers are employed by a business entity such as a corporation, and that entity is unable or unwilling to pay the wages that it owes. As demonstrated by the Atempa case analyzed below, the issue of whether individuals can be held liable can become critical when a corporate employer files for bankruptcy in an effort to avoid its obligations to its workers.

The relevant statutes discussed are Labor Code sections 558, 558.1, 1197.1, and 351. (more…)

Alter Ego/Piercing the Corporate Veil in California Wage and Hour Cases

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.