Corporate Officer Liability Under Fire

By Marina N. Vitek, Esq.

Recently the California Labor Commissioner, through the Division of Labor Standards Enforcement (DLSE), attempted to impose individual liability upon corporate officers for delinquencies in payment of wages of the corporation. The DLSE attempted to impose this liability not because the officer was “doing business as” or through a “veil-piercing” process but simply because the officer “had operational control” of the corporation’s enterprise.

Fortunately, it was decided in a recent decision from the California Court of Appeal that the Labor Code does not provide a claim against a corporate agent for unpaid employee wages and expenses. Such claims remain subject to established theories such as a claim that the corporation was simply the alter ego of the individual officer(s).

In Jones v. Gregory, the Court did not uphold the DLSE’s attempt to utilize the broad definition of “employer” provided in the Fair Labor Standards Act (FLSA) when interpreting the Labor Code statutes. Under the FLSA definition of “employer,” an individual corporate officer or owner may be deemed an employer under the FLSA—and therefore responsible for the corporation’s FLSA obligations—in situations where the individual (1) has overall operational control of the corporation, (2) possesses an ownership interest in it, (3) controls significant functions of the business or (4) determines the employees’ salaries and makes hiring decisions.

Likewise, the Court did not support the DLSE’s attempt to utilize the definition of “employer” promulgated by the Industrial Welfare Commission (IWC) which includes an individual who “exercises control over the wages, hours, or working conditions of any person.” However, unlike the FLSA and IWC wage orders, none of the Labor Code sections relied upon by the DLSE in its claims against the corporate officer supplied a definition, broad or narrow, for “employer.”

In conclusion, the Jones Court held that the Labor Code affords no redress against individual corporate officers for the wage obligations of the corporation based only upon the officer’s significant ownership and operational control of the corporation’s day to day functions. Without a specific definition in the Labor Code which includes the corporate officers or owners, enforcement against those individuals remain subject to established rules. The Court noted, however, that the claims at issue in Jones arose before enactment of the Labor Code Private Attorneys General Act of 2004 (Labor Code § 2698, et seq.). The Private Attorneys’ General Act is yet untested and may ultimately be found to permit a direct action by the employees against corporate officers for unpaid wages.

At issue is whether the absence of a definition of “employer” within the Labor Code, which would either include or exclude corporate officers and owners with significant control, constitutes a considered policy decision by the Legislature or a Labor Code gap. The inconsistent rulings surrounding this issue and need for California Supreme Court review is also highlighted by the recent jury verdict in a class action lawsuit against Wal-Mart, alleging Wal-Mart violated California Labor Code 512. Approximately $172 million in general and punitive damages was awarded to 115,000 individuals who worked for Wal-Mart in California between 2001 and 2005. Since the award appears to include damages for a period that exceeds the one-year statute of limitation and in essence, results in a “double penalty,” it appears likely that an appeal will be filed.

Regardless of how this story unfolds, it is important to be prepared. Prudent employers should conduct thorough reviews of their employment law compliance practices, paying close attention to proper employee classifications as exempt or nonexempt from overtime claims have up to a four year statute of limitations. Meanwhile, stay tuned for new developments in the courts … there is more to come.

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