United States: The Criminalization of Corporate Conduct—More than One Hundred Sections of the California Labor Code Provide for Criminal Liability

Most employers will agree that California can be an expensive place to do business. Intricate provisions of the California Labor Code dictate requirements ranging from the length and time of meal breaks, to the details that must be provided on an employee’s paystub. Failure to comply with these laws can be costly. But few may realize that the risks of noncompliance may carry an even higher cost that cannot be measured in dollars alone. Non-compliance can also include criminal liability in the form of criminally imposed fines and jail time.

There is no doubt that we are in the midst of a legal movement toward the criminalization of corporate conduct. A passing glance at today’s headlines reflects a seemingly endless series of stories of criminal prosecutions of corporate wrongdoing, often on a sweeping scale, by large corporations. This trend inevitably will reach down to smaller businesses. Given the breadth of potential criminal liability already existing in California, it is only a matter of time before these traditionally civil code violations form the basis of an increasing number of criminal prosecutions of employers. It is important that employers of all sizes and structures be hyper vigilant about complying with applicable labor and employment laws.

There are over one hundred sections in the California Labor Code that provide for criminal penalties.¹ This is, of course, in addition to any civil penalties that may attach. Many, but not all, of these provisions are set forth below. Unless otherwise specified, those provisions which do not identify a specific punishment are governed by Labor Code section 23 which provides as follows: "Except in cases where a different punishment is prescribed, every offense declared by this code to be a misdemeanor is punishable by imprisonment in a county jail, not exceeding six months, or by a fine not exceeding one thousand dollars ($1,000), or both." In addition, certain Labor Code sections specify that violations, while still classified as misdemeanors, may be punishable by a fine of over $1000 and/or jail time exceeding six months.

Although most code sections provide for misdemeanor punishment, some violations may amount to felonies. Although these sections do not specifically provide for felony charges, under California Penal Code section 2-24(17), crimes punishable by state prison time, as opposed to county jail time, are generally considered felonies. Accordingly, as to those Labor Code provisions providing for "imprisonment in the state prison" for a term of 18 months or more, one can assume that a felony conviction on an individual’s record will result.

As many employers know, the California Labor Code has a number of provisions regarding wages and overtime. Violations of these provisions can result in criminal liability:

• Labor Code § 553: Misdemeanor for violation of any provision regarding overtime, meal periods, alternative workweeks, makeup work time, and rest days (Labor Code §§ 510, 511, 512, 513, 551, 552);

• Labor Code § 1199: Misdemeanor punishable by a fine of up to $100 and/or imprisonment for up to 30 days for failing to pay minimum wage or requiring employees to work in violation of a Labor Commission order;

• Labor Code § 215: Misdemeanor for failure to comply with any one of seven provisions regarding the timing, method, and place of wage payments and postings related thereto (Labor Code §§ 204, 204b, 205, 207, 208, 209, and 212);

• Labor Code § 216: Misdemeanor for willfully refusing to pay wages due upon receiving a demand and/or falsely denying the amount or validity of a wage claim;

• Labor Code § 225: Misdemeanor for violating any one of four provisions regarding wage withholdings (Labor Code § 221, 222, 222.5, 223);

• Labor Code § 226.6: Misdemeanor punishable by a fine of up to $1000 and/or imprisonment of up to one year for failing to comply with the detailed, itemized paystub requirements set forth in Labor Code § 226;

• Labor Code § 354: Misdemeanor punishable by a fine of up to $1000 and/or imprisonment of up to 60 days for unlawful deductions from wages or gratuities/tips received by an employee and/or failing to keep accurate records of tips;

• Labor Code § 408: Misdemeanor punishable by a fine of up to $1000 or imprisonment of up to six months for violating restrictions on bond posting by and investments from employees (Labor Code §§ 401, 402, 403, 404, 405, 407); and

• Labor Code § 1175: Misdemeanor for failing to keep required payroll records and permit inspection by the Industrial Welfare Commission or Department of Labor Standards Enforcement pursuant to Labor Code §§ 1174.

Under Labor Code section 227, the failure to make required payments to a health or welfare fund, pension fund, vacation plan, or similar benefit fund is punishable by imprisonment of up to five years and/or a fine of up to $1000. Depending on the amount of money that is at issue, a violation of this section may be either a misdemeanor ($500 or less) or a felony.²

An employer is also guilty of a misdemeanor if it requires an employee to patronize the employer or requires the payment of an employment application fee. Cal. Lab. Code § 450. Additionally, if an employer requires an employee to sign a wage release without making payment of the wages, the employer may be charged with a misdemeanor. Cal. Lab. Code § 206.5.

Employers who discriminate in the payment of wages on the basis of sex may be guilty of a misdemeanor punishable by a fine of up to $10,000 and/or imprisonment for up to six months. Cal. Lab. Code § 1199.5.

Employers taking adverse action against employees who take authorized leave under certain circumstances specified in the Labor Code may also be guilty of a misdemeanor if they do not comply with a determination following a grievance procedure or hearing that the employee is eligible for rehiring or promotion:

• Labor Code §§ 230, 230.1: Employers must grant leave for jury or witness duty and for victims or parents of children who are victims of sexual assault or domestic violence;

• Labor Code § 230.3: Employers must grant leave for employees to serve as volunteer firefighters, reserve peace officers, or emergency rescue personnel.

Companies may also be subject to criminal liability for representations made to employees or other prospective employers:

• Labor Code § 971: Misdemeanor punishable by a fine of $50 to $1000 and/or imprisonment of up to six months for misrepresenting the nature, length, or conditions of employment (Labor Code § 970);

• Labor Code § 977: Misdemeanor for misleading an employee regarding compensation or commissions as set forth in Labor Code § 976; and

• Labor Code §§ 1050, 1052: Misdemeanor for making misrepresentations that prevent a former employee from obtaining employment.

Criminal liability may also attach for employers who intrude into an employee’s privacy:

• Labor Code § 435: Infraction³ for an employer to make an audio or video recording of an employee in a restroom or locker room; and

• Labor Code § 1051: Misdemeanor to require employees or applicants to be photographed or fingerprinted in violation of this section.

Certain Labor Code provisions applicable to union employees also provide for criminal penalties, although some of these statutes appear to be directed primarily at employees rather than the employer:

• Labor Code § 922: Misdemeanor to coerce an employee not to join a labor union;

• Labor Code § 1136: Subject to a fine of up to $1000 and/or imprisonment for up to ninety days for employing a professional strikebreaker;

• Labor Code § 974: Misdemeanor for failing to disclose a strike or trade dispute while advertising for employment (Labor Code § 973);

• Labor Code § 1015: Misdemeanor punishable by a fine of up to $1000 and/or imprisonment for up to 90 days for forging a union or labor association label or trademark;

• Labor Code § 1016: Misdemeanor punishable by a fine of up to $200 and/or imprisonment for up to three months for the unauthorized use or display of a union or association label or related mark;

• Labor Code § 1017: Misdemeanor to use a labor union card without entitlement; and

• Labor Code § 1018: Misdemeanor punishable by a fine of up to $40 and/or imprisonment for up to 20 days in county jail for unauthorized wearing of a union button.

Detailed provisions regarding the employment of minors also provide for criminal penalties:

• Labor Code § 1303: Misdemeanor punishable by a fine of $1000 to $5000 and/or imprisonment in the county jail for up to six months for any person, agent, or officer who violates any one of the eleven provisions regarding employment of minors (including Labor Code §§ 1290 (employment of minors under 16 restricted unless otherwise provided by the Labor Code or Education Code), 1292 (specific machinery-related tasks prohibited for minors under 16), 1293 (minors under 16 prohibited from working on specific machines), 1293.1 (dangerous and hazardous work prohibited for minors under 12), 1294 (prohibiting certain types and places of employment for minors under 16), 1294.1 (types of occupations

• prohibited for minors under 16), 1295.5 (restricting employment of minors in sports attending services in baseball), 1296 (DLSE can determine additional requirements), 1297 (restrictions on minors working as messengers), 1298 (limitations on minors selling/distributing newspapers and magazines), 1299 (employers’ obligation to maintain permits and certificates), 1308.1 (limitations on door-to-door selling by minors);

• Labor Code §§ 1308, 1309: Misdemeanor punishable by a fine of $1000 to $10,000 and/or imprisonment in county jail for up to six months for any person or employer who employs minors in certain prohibited professions

• Labor Code §§ 1308.2, 1308.3: Misdemeanor punishable by a fine of $1,000 to $10,000 per conviction for failure to comply with registration requirements regarding employment of minors and/or persons supervising or transporting minors for door-to-door sales; and

• Labor Code §§ 1308.5, 1308.7, 1308.8: Misdemeanor punishable by fines of up to $5000 and/or punishment in county jail for up to 60 days for failure to comply with provisions regarding employment of minors in entertainment-related positions.

Potential criminal liability also attaches to certain workers’ compensation code provisions:

• Labor Code § 132(a): Misdemeanor to discriminate or retaliate against employees for workers’ compensation injuries and claims;

• Labor Code § 3550: Misdemeanor for failure to comply with posting requirements regarding workers’ compensation insurance carrier;

• Labor Code § 3700.5: Misdemeanor punishable by a fine of at least $10,000 and/or imprisonment for a period of up to one year for failing to secure workers’ compensation insurance; and

• Labor Code § 3710.2: Misdemeanor punishable by a fine of up to $10,000 and/or imprisonment of up to 60 days for failure to comply with a stop order.

Criminal liability may also attach to other violations of workers’ compensation statutes. See Cal. Lab. Code §§ 139.3(g) (prohibits doctor’s referrals to entity in which he/she has financial interest), 139.43 (prohibits false advertising of services or benefits), 3215 (prohibits referrals for money or other compensation), 3218 (describes punishment for violation of 3215), and 3219 (prohibits compensating adjuster of claims for referral or settlement) (felony).

Several health and safety related provisions of the Labor Code also provide for criminal penalties:

• Labor Code §§ 6423, 6425: Violations of health and safety orders, failure to report a death, or failure to comply with an order from OSHA may be punishable by imprisonment of up to four years and/or a fine of up to $3,500,000;

• Labor Code § 2441: Misdemeanor punishable by a fine of up to $200 per violation and/or imprisonment for up to 30 days for failing to provide fresh drinking water to employees; and

• Labor Code § 2354: Misdemeanor punishable by a fine of up to $600 or imprisonment in county jail for 30 to 60 days for failing to comply with sanitation and ventilation requirements.

In addition to the Labor Code sections discussed above, a number of other provisions relating to specific types of employment include criminal penalties. These provisions relate to, for example, meal periods for employees in the lumber industry; bonding requirements for the logging industry, theatrical enterprises, or talent agencies; provisions regarding "industrial homework" (the manufacture of goods in an employee’s home); and the provision of seats for elevator operators. Cal. Lab. Code §§ 800, 801, 270.5, 271, 1701.10, 2667, and 7319. See also Labor Code § 7156 (construction and painting industry); Labor Code § 6509 (asbestos); Labor Code § 853 (employment of pharmacists); and Labor Code § 606 (railroads).

Employers who are public works contractors are subject to additional criminal liability and may even be guilty of a felony for some violations. Cal. Lab. Code §§ 1777, 1778, 1779, 1780 (public works).

Employers who retaliate against employees for whistle-blowing, filing claims, or refusing to engage in illegal activity also face criminal liability in addition to civil penalties:

• Labor Code § 98.6: Misdemeanor for employers who discriminate against employees for making complaints to the Department of Labor Standards Enforcement (DLSE) and then refuse to comply with a hiring, promotion, or reinstatement;

• Labor Code § 1103: Misdemeanor punishable by imprisonment in county jail for up to a year and/or a fine of up to $5000 for retaliation against whistle-blowers;

• Similarly, employers who interfere with state agencies charged with enforcement of the Labor Code provisions may be held criminally liable:

• Labor Code §§ 90, 91, 93: Misdemeanor punishable by a file of up to $1000 and/or imprisonment for 7-30 days for employers who fail to provide access to the DLSE or who interfere with the DLSE’s duties;

• Labor Code § 152: Misdemeanor for failure to provide the Division of Labor Statistics (DLS) (a division of OSHA) with requested information or refusal to admit the DLS for an inspection; and

• Labor Code § 1151.6: Misdemeanor punishable by a fine of up to $5000 for interference with the Agricultural Labor Relations Board.

It is rare that one hears about a CEO going to jail for not including the correct information on an employee’s paycheck. In the greater world of criminal law enforcement, violations of the Labor Code probably do not rank high on the list for state prosecutors. But there have been a number of instances, evidenced by published appellate decisions, in which individual employees and employers were criminally charged under the California Labor Code.

Potentially criminal conduct may be brought to the attention of the authorities in any number of ways. Often, a criminal investigation may arise out of the aftermath of a serious accident that has resulted in death or injury to one or more employees. The investigation to ascertain the cause of such an event can rapidly evolve into an investigation of criminal wrongdoing. Similarly, individuals conducting a routine inspection may observe an irregularity or code violation of sufficient severity to merit reporting to a law enforcement agency as well as to their investigating agency. Finally, it is not at all uncommon for a disgruntled current or former employee to report alleged violations to police or other authorities, to company Human Resources managers, or through an employee anonymous complaint "hotline."

If the ensuing investigation yields sufficient evidence, the Office of the Attorney General or the local District Attorney has the sole discretion to charge the case criminally. Unlike the civil corollary, all criminal charges must be supported by evidence sufficient to prove the case beyond a reasonable doubt. This higher burden of proof may serve to discourage prosecutors from filing cases where the evidence is thin. However, if the evidence is strong and the prosecutors elect to proceed criminally, an employer may face a very real threat of criminal fines and even imprisonment. As the following cases illustrate, criminal prosecution is a very real concern for employers.

In People v. Bishopp, 56 Cal. App. 3d Supp. 8 (1976), the State of California charged the defendant employer with criminal violations of Labor Code section 216(a) when the defendant refused to pay its employee for vacation pay earned and due. In Ephraim v. Jamestown Judicial Dist. Court, 120 Cal. App. 2d 741, 742 (1953), an employer was criminally charged with a violation of Labor Code section 204 for failing to maintain a semimonthly payroll for his employee. In another case, an employer was convicted of violating Labor Code sections 204, 216, and 222. People v. Power, 159 Cal. App. 2d Supp. 869, 870 (1958).

Employers have also been charged with violations of Labor Code section 212 (a) for issuing paychecks with insufficient funds. See People v. Ayub, 202 Cal. App. 3d 901, 903 (1988). See also People v. Hampton, 236 Cal. App. 2d 795, 798 (1965).

In Cairy v. Superior Court, 192 Cal. App. 3d 840, 842 (1987), the employer was criminally charged with a violation of Labor Code section 227, which makes it a crime to willfully, and with intent to defraud, fail to make required payments to an employee pension fund. See also People v. Alves, 155 Cal. App. 2d Supp. 870 (1957) (same).

In one case, the owner and manager of a construction company were charged with felonies under Labor Code § 1778 for unlawfully taking a portion of an employee’s wages. People v. Incho Hwang, 25 Cal. App. 4th 1168 (1994).

An employer in People v. Keefer, 146 Cal. App. 2d 726 (1956) was convicted and sentenced to prison for violating Labor Code section 405 which limits the use of employee bond money. See also People v. Vandersee, 139 Cal. App. 2d 388 (1956) (criminal charges for violation of Labor Code section 405 relating to property put up as a bond by an employee).

In People v. Hutchings, 69 Cal. App. 3d Supp. 33, 35 (1977), the defendant employer was charged with a misdemeanor for violating Labor Code section 1174 which requires access to payroll records, although the charge was dismissed on the grounds that the statute was unconstitutional.

Employers have also been criminally charged for failing to secure workers’ compensation insurance for an employee. See People v. Doctor, 257 Cal. App. 2d 105, 106 (1967) (misdemeanor for violating Labor Code section 3710.2).

Under California law, a corporation may be civilly liable for the criminal acts of an officer, agent or employee so long as the employee is acting within the course and scope of his or her employment. "Course and scope" are broad terms and may include actions that in part benefit the employee or that violate company policy. Although a corporate officer’s liability is more limited than the company’s liability, officers, agents, and employees who fail to abide by the numerous California Labor Code provisions may be at risk for individual liability.

California law has always made clear that no individual can be held criminally culpable for the act of his or her employer unless the individual directly or indirectly causes the charged conduct. Otis v. Superior Court, 148 Cal. 129, 131 (1905). ("An officer of a corporation is not criminally answerable for any act of a corporation in which he is not personally a participant.") However, many criminal penalties provided in the Labor Code expressly apply to "any person, or an agent, manager, superintendent, or officer thereof." See, e.g., Cal. Lab. Code §§ 215, 216. Other provisions provide separate and distinct punishments for employer and employee, indicating an intention to hold individuals responsible. See, e.g. Cal. Lab. Code § 1103. Accordingly, individuals who participate in conduct that violates the Labor Code may face criminal persecution.

In Reynolds v. Bement, the California Supreme Court confirmed that individuals are not liable as "employers" for failing to pay overtime to employees. Reynolds v. Bement, 36 Cal. 4th 1075 (2005). However, the Reynolds case dealt specifically with whether the individual officers and shareholders qualified as employers under the applicable statute and Industrial Welfare Commission wage orders. Reynolds is likely dispositive of individual liability under other Labor Code provisions that apply to employers only, but it is unlikely to extend to those Labor Code sections that specifically provide for individual liability. Ultimately, the decision to charge the individual, the corporation or both will rest in the discretion (or at the whim) of the local prosecutors.

Many employers are aware that they may be vicariously liable for an employee’s criminal acts that are committed within the course and scope of employment. See Alma W. v. Oakland Unified School Dist., 123 Cal. App. 3d 133, 138 (1981). A recent decision in New Jersey demonstrates that crime victims or their relatives may hold an employer responsible for criminal acts of an employee if the employer "knew or should have known" about the illegal activities. In Doe v. XYZ Corp., 328 N.J. Super. 122 (2005), an employee used his company computer to access porn cites, including some that referred to children. When the employer became aware of this use, it ordered the employee to stop his computer activity. Shortly thereafter, the employee was arrested on child pornography charges after the police executed a search warrant. He admitted to downloading over 1000 pornographic images during his employment. He also admitted to storing child pornography on his company computer, including nude photos of his 10 year old stepdaughter. The girl’s mother then sued the employer for its failure to report its employee’s conduct to the police. The New Jersey appellate court reversed the lower court (which granted summary judgment in the employer’s favor) and held that "an employer who is on notice that one of its employees is using a workplace computer to access pornography, has a duty to investigate the employee’s activities and to take prompt and effective action to stop the unauthorized activity."

Although California courts have yet to extend employer liability this far, it may be just a matter of time. California has already adopted the principles necessary to justify a decision like the one made in XYZ. For example, employers may be liable for sex harassment by a non-supervisory employee when it "knows or should have known of [unlawful conduct] and fails to take immediate and appropriate corrective action." Cal. Gov’t Code § 12940(j)(1). Employers may also be liable to third parties for negligent hiring or supervision of an employee when the employer "knows, or should know, facts which would warn a reasonable person that the employee presents an undue risk of harm to third persons in light of the particular work to be performed." Federico v. Superior Court, 59 Cal. App. 4th 1207 (1997). California may not be far behind New Jersey in extending the employer’s potential liability for its employees’ criminal activity.

The risk of criminal liability for corporate conduct in the employment arena is both significant and real. The expanding scope of criminal liability exposure in turn expands the scope of corporate governance obligations to include, for sure, compliance with all applicable state labor-related laws. Employers should take all steps necessary to understand and comply. Employers are well advised to contact counsel promptly when the possibility of code violations with criminal liability exposure arises or when employers have reason to believe that an employee may be engaging in criminal conduct. Involving legal counsel early will ensure that communications are privileged and strategies protected by work product or attorney-client privilege. Legal counsel also will help define the scope of any subsequent investigation as well as the appropriate remedial response. Attorneys can assist employers in retaining a third-party investigator, developing defense and resolution strategies, and avoiding overlap with other state or federal regulatory schemes that carry significant civil or criminal liability exposure.

In addition, employers are well advised to evaluate their document retention policies, particularly in light of recent litigation that demonstrates the substantial risks associated with failure to preserve electronic and hard copy data. The loss of documentation of facts and evidence relevant to violations with criminal exposure will increase the risk of criminal liability. Adverse inferences and evidentiary findings due to loss of evidence can preclude establishing otherwise meritorious defenses. Preventative measures accompanied by an immediate and appropriate response will help avoid significant financial and criminal consequences.

Finally, employers are well advised to undertake routine compliance audits, preferably in a privileged context at the direction of outside counsel, to ensure internal consistency and overall compliance. Whether facing civil claims that carry increased penalties for "willful" conduct, or criminal liability for alleged commission of criminal acts, the employer’s best defenses may arise from a clear intent to comply as established by clear policies, practices, and reporting mechanisms that mandate and help ensure vigilant across-the-board compliance throughout the workforce.

Footnotes

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