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.