Alert: California Supreme Court Finds That Individual Corporate Officers and Directors Were Improper Defendants In Overtime Claim

August 15, 2005

Last Thursday, August 11, 2005, the California Supreme Court unanimously ruled that officers, directors and managers are not "employers" for purposes of wage liability.  In Reynolds vs. Bement, No. S115823, the court sustained trial court demurrers and overturned the Court of Appeals, holding that only the corporate employer was liable for unpaid overtime wages.  The court left open the possibility, however, of California Department of Labor Standards Enforcement (DLSE) prosecution against responsible individuals for causing an employer not to pay wages.  The court also did not address whether individuals may be liable for wages under the 2004 Private Attorneys General Act.

Plaintiff Steven Reynolds claims that his employer, Earl Scheib, Inc., an automobile painting business in Los Angeles County, failed to pay overtime for him and other shop managers.  He filed a class action against both the company and eight individual officers and directors, who were also shareholders.  Reynolds alleged that the individuals had established and maintained a "policy and practice" of avoiding overtime so as to maximize profitability.  Reynolds alleged that the failure to pay overtime violated Labor Code §§ 510 and 1194, as well as Industrial Welfare Commission (IWC) Wage Order 9. 

Reynolds alleged that the individual directors and officers were liable for the unpaid overtime wages because they fell within the IWC Wage Order definition of "employer"  as one who "exercises control over the wages, hours or working conditions of any person."  The court concluded that this broad regulatory definition was not intended to apply to the civil liability statutes.  Thus, since the statutes themselves lacked a definition of "employer," the court applied the common law principle that corporate agents acting within the scope of their agency are not personally liable for the corporate employer’s obligations.  Responding to concerns raised by the DLSE as amicus curiae, however, the court opined that its decision did not prevent the DLSE from pursuing actions against individuals in exercise of its own prosecutorial discretion.  The court also noted that individuals may be liable for civil penalties arising from their refusal to pay wages.

Employers should also keep in mind that the 2004 Private Attorneys General Act (PAGA), Labor Code Section 2699, et seq., may provide employees an alternative vehicle to bring suit against individual managers and officers on behalf of themselves and other employees for civil penalties and attorneys' fees.  Because the PAGA was not in effect at the time the Reynolds case was filed, it was not addressed in the decision.  The PAGA contains a potentially broader definition of “employer,” which courts have not yet interpreted.  Also, the California Legislature is currently considering, Senate Bill 174, which would permit an employee seeking to recover unpaid overtime compensation or unpaid minimum wages to sue on behalf of himself or herself and other current and former employees – without having to follow strict class action rules – if the employees were receiving less than twice the minimum wage.

For more information about this or other employment-related matters, please contact a member of the firm’s Employment Practice Group.