California Supreme Court Holds Corporate Officer's and Director's Personal Assets Are Not Open To Plaintiffs in Wage and Hour Lawsuits

On August 11, 2005, the California Supreme Court held that California's labor statutes do not impose personal liability on corporate officers and directors for unpaid wages owed by a corporate employer. (The case is Reynolds v. Bement - view the decision in PDF or WORD)

Plaintiff Steven Reynolds brought the action against Earl Scheib, Inc. and various other individual defendants who are shareholders of the corporation. Plaintiff alleged that the defendants misclassified the Shop Managers as exempt employees to deprive them of "statutory overtime compensation in order to maximize defendants' profits and income."

Plaintiff argued that he could attempt to recover the alleged unpaid wages by personally suing the individual defendants. Plaintiff argued that the Industrial Welfare Commission (IWC), which has authority to promulgate regulations (a.k.a. wage orders) regarding employment within California, has defined employer to mean:

an individual who "exercises control over the wages, hours, or working conditions of any person." (Wage Order No. 9, subd. 2(F) (hereafter the IWC employer definition).)

While this definition encompasses corporate shareholders and policy makers, the California Labor code fails to define "employer" (which seems to be a glaring omission by the California legislature - but now they are on notice to correct the issue). The Supreme Court stated:

Noting that section 510, in obligating "an employer" to pay overtime compensation, does not define that term, and that section 1194, in providing "any employee" with a private right of action to recover unpaid minimum or overtime wages, does not specify potential defendants, plaintiff argues we should apply the IWC employer definition in order to determine who are proper defendants here. That definition, plaintiff asserts, includes corporate control figures like the individual defendants.

The Supreme Court refused to accept Plaintiff's proposition to "infer" that the IWC definition applies to the Labor Code and instead held (in a rare example of judicial restraint by the California Supreme Court) that since the Labor Code does not define the term, it must look to the common law definition of employer. While leaving the common law definition of employer unexamined, the Court held that "[u]nder the common law, corporate agents acting within the scope of their agency are not personally liable for the corporate employer's failture to pay its employee's wages."

It is important to note, however, that plaintiffs can still recovery penalties pursuant to Labor Code section 558 from individual shareholders personally. Section 558 provides:

Any employer or other person acting on behalf of an employer who violates...any provision regulating hours and days of work in any order of the [IWC] shall be subject to a civil penalty as follows: (1) For any initial violation, fifty dollars ($50) for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages. (2) For each subsequent violation, one hundred dollars ($100) for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages.

And, as the Court noted, if the Plaintiff is successulf in alleding an alter ego theory against the corporation, the company owners/sharholds will be personally liable.

Recent California Supreme Court Ruling Does NOT Place "Attractiveness" in a Protected Category, But it Does Require Employers to be Mind Readers

In a recent decision by the California Supreme Court (Yanowitz v. L'Oreal), the Court held that employers are liable for retaliation if the employee reasonably believes the employer's conduct violated the California Fair Employment and Housing Act (FEHA) even if: (1) the employer did not violate FEHA; and (2) the employee "does not explicitly state to her supervisor or employer that [the employee] believes the order to be discriminatory." In summary, the Court now requires employers to be mind readers.

While many are reading this case as establishing a protected category for "attractiveness" the Court does not go that far (or depending on your perspective- is not that limited). It basically states that if an employee believes that an order or conduct of his/her employer (in this case the employer told the employee to fire a sales person because she was "not good looking enough" and to "[g]et me somebody hot) is discriminatory - even though under the law it is not - and the employee complains or puts the employer on notice that he or she believes the conduct to be discriminatory, the employee can have a claim for retaliation.

In this case, the plaintiff claims she complained of sexual harassment when she questioned her supervisor's request to terminate the sales associate for somebody more attractive. The plaintiff said that after she did not fire the sales associate, her supervisor asked why this had not been done yet, and she responded that her supervisor needed to give her "adequate justification" for firing the sales associate.

Justice Chin, who disagreed with the Court's ruling, wrote in his dissenting opinion that:

She [the plaintiff] never mentioned to anyone within the company that she felt the order was discriminatory. She never explained, or even alluded to, what she articulated in her declaration that "[t]his was the first time in all of my years as Regional Sales Manager that anybody had ever asked me to make a final employment decision based upon the physical appearance, much less the subjective physical appearance, of an employee." She kept her belief, and all of the reasons she allegedly had for that belief, entirely to herself.

The majority claims that plaintiff's statement to Wiswall [plaintiff's supervisor] that she needed justification presents a prima facie case that she complained of unlawful sex discrimination. This statement, however, was not a claim of discrimination at all, much less sex discrimination. As L'Oreal aptly points out, a manager's request for "adequate justification" from a superior could convey reservations about the wisdom or soundness of the superior's directive from a business standpoint - why seek the removal of a salesperson who (the manager believes) is doing a good job? Why needlessly risk antagonizing the important account employing the salesperson? The manager may simply be reluctant to carry out an unpleasant task directed at a person the manager personally likes or respects. Or perhaps she simply thinks the directive is unfair.

All of these are very logical possibilities that have nothing to do with sex discrimination or discrimination of any kind. Indeed, plaintiff herself indicates in her declaration she believed the order was a bad business decision because the salesperson in question was a top performer - information that she also apparently kept to herself. Plaintiff's mere request for justification is even further removed from a complaint of discrimination than those found too vague in the cases cited above. She did not come close to making "an overt stand against suspected illegal discriminatory action." Nor did she even give Wiswall, or anyone within L'Oreal, "sufficient facts from which he could conclude that plaintiff's problem involved sex discrimination. At most, she "was contesting the correctness of a decision made by [her] employer," which is insufficient. (citations omitted)

Basically, employers now need to read employees' minds regarding whether an action they have taken is believed by the employee to be in violation of the law and if the employee does not specifically say that they believe the action is in violation of the law, the employer still needs to examine the employee's mannerisms to extrapolate whether the employee subjectively believes the employer violated the law. Justice Chin, again, makes a good point in his dissent: "It makes no sense to hold both that the conduct need not be unlawful and that the plaintiff need not complain of it."

The Court also clarified two other technical aspects of sexual harassment law: (1) the Court held that the proper standard for defining an adverse employment action is the "materiality" test, as opposed to the "deterrence" test; and (2) the "continuing violation" doctrine is applicable to retaliation claims and courts may consider the totality of circumstances (including violations that allegedly occurred outside of the statute of limitations period).

Yanowitz will have a dramatic effect on employers within California. Justice Chin appropriately concluded his dissent by stating: "The FEHA's purpose is to prevent discrimination, not to encourage employees to generate lawsuits quietly. The majority encourages the generation of stealth lawsuits but does nothing to further the purpose of the retaliation cause of action or the FEHA itself."

Employment Law Meets Blogging

Employment lawyers across the nation will see the increase in popularity of blogs as another opportunity to "sell" business owners and companies on establishing a "blog policy." Employers need not jump at every new technological development (or any other development for that matter) and establish a new policy that is as confusing as the other hundred or so policies the company already has in place. But the discussion of establishing a blogging policy is a good reminder of policies that employers should have (and hopefully are well drafted to already cover issues like blogging).

MSN published a great article about whether employees can be fired for blogging (click here for the article). Also, many blogs picked up a story about a Delta Air Lines flight attendant who was fired when the company found "inappropriate" pictures of her in her uniform posted on her blog.

Contrary to the hype blogs have recently received, blogs are not a vastly new means for employees to publish information about their employers - people seem to forget that web-sites have been around for 10 years now. If a company did not have a policy regarding employee web-sites - why would it now need a policy on employee blogs?

Employer's policies should be well drafted and give the employees an overview of what type of behavior - during and off work is expected of them. Remember, employers cannot control employee's behavior when they are not at work, but employers usually can terminate/discipline employees for posting negative information about the company (or company trade secrets) on the internet even if the employee posted the negative information on their own time from their home computer. The term "usually can" is used in the previous sentence because employers must be careful not to terminate employee's because they have "blown the whistle" about the company's possible violation of laws - this could set the company up for a wrongful termination lawsuit. In addition, California law protects employees' rights to certain communications. For example, Labor Code section 232 prohibits employers from discharging, disciplining or discriminating against employees who disclose the amount of his or her wages. Furthermore, courts have also said that the National Labor Relations Act (NLRA) protects certain employee activity, including participating in a group discussion about the fairness of compensation (note that employees do not have to be a member of a union to have protection of the NLRA).

Employers should review their current policies to make sure that the policy complies with the law and provides the employees with notice of what is appropriate behavior and what is not. However, employers should consult an attorney before implementing such a policy to avoid potential pitfalls.

I know you are now curious to see the pictures that Delta felt were inappropriate. If so, click here.

Dr. Lee Humor

In brining some humor to Microsoft's attempt to prevent its former executive Dr. Lee from working at Google for the next year, WebProNews suggests that Dr. Lee fill an open "executive chef" position listed on Google's "open positions" postings. They also note that Dr. Lee is not one for idle time:

Give the man credit. When stuck for a way to finish his grad paper on speech recognition, he took a year off to write a world-champion Othello program. Then came back and knocked off that pesky paper to earn his doctorate.

That's a geek hero if there ever was one. All he needs is a Persian cat and a monocle and he could take over the world. Hey Doc, if you're not going to be busy for the next few months, why not stop by the WebProNews offices? We'd like to see if you're as good at backgammon as you are at Othello.

Small and Medium Sized Business Owners' New Job Requirement: Being Deposed (Items You Should Know About Being Deposed)

As a recent Wall Street Journal mentioned, a deposition is becoming a “rite of passage for ambitious managers,” and I would suggest that this applies to successful small to medium sized business owners as well. Small or medium sized business owners often do not have the barrier between them and litigation filed against their business that executives in large companies usually have. Courts just do not seem to understand that a fortune 500 executive’s time is just as scarce as is a small business owner’s time who employs 10 to 20 people. Be it as it may, small to medium sized business owners will often find themselves being deposed in litigation covering a breach of contract claim with a supplier to an employment litigation claim filed by a former employee - and they cannot prevent this from happening, but they can prepare for it. Here is a brief list of what to expect and some items to keep in mind when you are deposed:

1. Keep answers to either a simple “yes” or “no,” if possible. The more you talk, the more questions the opposing attorney is going to through follow-up questions. The more you talk the greater the chance that you will say something the opposing counsel and use against you. The deposition is not your time to tell your side of the story - your attorney will give you your opportunity to do this under better circumstances (such as through motions or through a sworn declaration signed by you).

2. Prepare before the deposition. Review the relevant documents with your attorney. Discuss legal theories with your attorney and get an understanding of the law so that you have an overview of your case.

3. Take breaks often. Even thought it feels like an interrogation, it is not. You are free to take a break at any time during the deposition, no matter what opposing counsel tells you. Note: It hurts your credibility if it looks like you have to discuss your answer with your lawyer before you answer a question - so sometimes your lawyer will tell you not to take a break while a question is pending (see item #7 below.)

4. Remain calm. Opposing counsel will probably use multiple tricks to try to get you to talk. They will try being your friend (see item # 5) and they will try to get you to lose your temper - all in a calculated effort to get you to lower your guard and say something that will hurt your case. Remember, everything opposing counsel does is calculated - therefore every answer and emotion you have should also be under control and calculated.

5. Remember - no matter how nice opposing counsel is to you, he or she is not your friend and only wants your money.

6. You are never truly “off the record” - even when you are in the bathroom. A court reporter will be present during the deposition, and attorneys will resume the deposition by saying “back on the record” and in the same way stop the deposition by saying “off the record.” Even though you are “off the record,” do not talk about the case at all (in fact, do not talk at all - any thing you talk about - your family, what you did over the weekend - may have some relevance to your case and you do not want to provide opposing counsel with this “free” information). Even if you are only talking to your attorney, but others are present, the fact that others can hear your discussion will usually not make those communications confidential or protected by the attorney-client privilege.

7. Always follow your attorney’s advice. You are paying good money to have him or her present, so follow the instructions he or she gives you during a deposition. If you disagree with your attorney, wait until a break and raise the issue with him or her outside of opposing counsel’s present.

8. Be truthful. It is especially hard today to expect to cover up a “bad fact” by lying about it given all of the different ways our actions are recorded throughout the day via emails, voicemails, building security tapes and records, etc…. And when the opposing counsel discovers your lie, it will embolden their efforts and destroy your credibility.