A recent California Supreme Court decision found that corporate officers and directors are not individually liable for employee wages, such as overtime pay, under California’s Labor Code. While the case, Reynolds v. Christian Bement, creates a little breathing room for executives in a time when laws such as Sarbanes-Oxley (the law that requires certification of financials and has increased scrutiny of corporate governance) have increased officer and director liability, it leaves the door open for executives to be liable for civil fines and penalties under California’s 2004 Private Attorney General Act.

The Reynolds’ case involved a company, Earl Scheib, that owned and operated approximately 50 automobile painting shops in California. Earl Scheib employees, including shop managers, sued the individual executives, who were also Earl Scheib Shareholders, claiming the officers and directors had a policy of requiring employees to work long hours with no overtime pay and misclassifying the shop managers as employees exempt from overtime wages in order to avoid paying overtime.

California has a strong public policy favoring enforcement of its wage laws, including overtime pay. The Industrial Welfare Commission ("IWC") has the power to issue regulations regarding those laws and also the power to set the minimum wage and provide safeguards to ensure employees are paid those minimum wages.

The IWC has issued regulations which define "employer" broadly as any individual "who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or work or any person." Cal. Code Regs., tit. 8, § 11090, sub. (2)(f). The Supreme Court in Reynolds was asked whether the IWC’s broad definition of "employer" applies in a state court action. It found that since the state legislature had not adopted this definition, it does not apply.

The court's ruling was in keeping with traditional notions that corporate agents are not individually liable for breach of contract or inducing a breach of contract. The employment relationship is based on the contract of wages paid for services rendered. However, there are exceptions to this rule. The Court noted that individual officers and directors could still be liable for wages jointly with the employer under federal law as well as in certain circumstances under state law. Examples of situations where liability may be imposed under state law include:

  • Where officers and directors are acting outside the course and scope of their employment and engaging in some tortious or fraudulent conduct; or
  • Where the corporation is really a sham and being solely operated for the benefit of a few individuals who fail to follow corporate formalities.
  • Although not addressed by the court, exposure may exist when a corporation enters the zone of insolvency. That is, when a company’s poor financial status requires its officers and directors to serve not only the interests of shareholders but also creditors.

In addition, the Court, in a concurring opinion, noted that the 2004 Private Attorney General Law, which allows individuals to enforce the Labor Code and collect civil fines and penalties previously only collected by the Labor Commissioner, provides that such fines and penalties may be awarded against "any employer or other person acting on behalf of an employer."

The Reynolds decision is a reminder to executives and employers alike that the violation of California’s wage laws is costly and should be avoided.

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