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.