United States: California Expands Personal Liability For Wage And Hour Violations And Enhances Labor Commissioner Enforcement Measures Under The New "A Fair Day's Pay Act"

On October 11, 2015, Governor Jerry Brown signed into law the "A Fair Day's Pay Act," which expands liability for willful wage and hour violations to owners, directors, officers, and managing agents of the employer, as well as establishes new procedures the Labor Commissioner can use to enforce judgments from unpaid wages.

Effective January 1, 2016, the new law impacts wage and hour liability in the following ways.

Expanded liability for wage and hour violations to individual owners, directors, officers, and managing agents via new Labor Code section 588.1.

In California, wage and hour rights are closely regulated by statute under the California Labor Code, which prescribes, among other things, such employment aspects as the payment of wages, minimum wage and overtime requirements, and meal and rest period requirements. Additionally, the now defunct Industrial Welfare Commission was empowered to formulate regulations, known as Wage Orders, governing employment in various industries and occupations. The California Division of Labor Standards Enforcement (DLSE), headed by the Labor Commissioner, is empowered to enforce California's labor laws. In addition, the Labor Code affords employees private rights of action against employers for wage and hour violations.

Under California law, if an employer allegedly committed wage and hour violations, an employee has two options to seek remedy: (1) seek administrative relief by filing a claim with the Labor Commissioner, or (2) seek judicial relief by filing a private lawsuit against the employer for violations of the Labor Code. Under either option, prior to the passage of the "A Fair Day's Pay Act," liability for wage and hour violations could not be imposed upon individual corporate owners, directors, officers, or managing agents merely by virtue of their corporate position. While the Wage Orders included such individuals in its definition of "employer" for purposes of liability, the Labor Code did not, and the California Supreme Court had determined that where the Labor Code and Wage Orders conflict, the Labor Code controls.

However, the "A Fair Day's Pay Act" amends the Labor Code and adds section 588.1, which expressly defines "employer or other person acting on behalf of an employer" to include a "natural person who is an owner, director, officer, or managing agent of the employer." As a result, an employee can now bring wage and hour claims against the corporate owners, directors, officers, or managing agents (e.g., department supervisors, payroll managers, human resources managers, other employees with the authority to transact on behalf of the business) who violate or cause to be violated various wage and hour laws in the Labor Code and name them as individual defendants in a lawsuit. Additionally, the new law amends other portions of the Labor Code, empowering the Labor Commissioner to investigate, hold hearings, and recover civil penalties and citations from individuals liable under new section 588.1. As a result, individual corporate defendants are no longer immunized from personal liability for wage and hour violations.

New and enhanced Labor Commissioner enforcement measures.

The new law also gives the Labor Commissioner the ability to use any existing methods available to a creditor when enforcing a judgment. In other words, if an employee brings a successful wage claim against an employer, the Labor Commissioner can now place a lien on the employer's property, or levy the business' assets. Because liability can now extend to individual corporate owners, directors, officers, or managing agents, the Labor Commissioner can also seize the property and assets of such corporate individuals.

Additionally, new Labor Code section 238 introduces penalties in addition to any wages and attorneys' fees owed to an employee. The penalty is $2,500 for the first wage and hour offense, and $100 for each calendar day thereafter an employer continues to do business in violation of the law, up to a $100,000 cap.

The new law also extends liability to successor entities. Any new business that is "similar in operation and ownership" to the liable employer is also liable for any wages owed. More specifically, the law states that a new business will be considered the "same employer" for liability purposes if (1) the employees of the successor employer are engaged in "substantially the same work in substantially the same working conditions under substantially the same supervisors," or (2) the new entity has "substantially the same production process or operations, produces substantially the same products or offers substantially the same services, and has substantially the same body of customers."

There are also added consequences for failing to satisfy a judgment. Once an employer is found to have committed wage and hour violations, if the judgment is not satisfied within 30 days after the deadline to appeal has expired, the Labor Commissioner can now require the employer, or successor entity deemed the "same employer," to post a bond to continue to do business within the state. The bond amount ranges from $50,000 to $150,000 depending on the amount of unpaid wages. Employers who fail to post the required bond can have their business licenses revoked.

Corporate indemnification and "A Fair Day's Pay Act's" narrow aim.

Although the new law expands corporate individual liability for wage and hour violations, in most circumstances the practical effect of the "A Fair Day's Pay Act" will not be felt by most corporate owners, directors, officers, or managing agents. The Labor Code and Corporations Code provides California employees and corporate agents with mandatory rights to indemnification for expenses, which can encompass legal expenses. As a result, the corporate entity "employer" is clearly obligated to indemnify and hold harmless its employees for underlying lawsuits asserting claims against the employee for performing its duties. A key limitation, however, is the circumstance in which an employee, when performing its duties or obeying directions, believes the actions were unlawful and intentionally acted anyway. In such a circumstance, no indemnification will likely be required.

Nevertheless, while indemnification reduces the sting from expanded individual liability under the new law, it still leaves open the possibility of future litigation to test the law's scope and limits. Therefore, the possible effects of expanded individual liability for corporate owners, directors, officers, and managing agents will likely be an issue in the short term. Although it may be relatively unusual for most corporate owners, directors, or officers to be involved with ground-level administration of wages, hours, or conditions of work, it is important for such individuals to be aware of the new expansion of personal liability under California law. Consequently, employers should re-familiarize themselves with California's extensive wage and hour laws, including any applicable Wage Orders in the employer's specific industry, and proactively consult with your employment counsel to answer questions, address concerns, and advise compliant practices and procedures so as to avoid costly and time-consuming litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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