Legal Summary: Shareholders of Closed Corporations Can Still Have Personal Wage & Hour Liability

Legal Summary: Shareholders of Closed Corporations Can be Personally Liable for California Wage and Hour Violations

More than once, we have encountered an angry business owner who wants to know exactly how it can be that she can personally be liable for violations of California’s wage and hour laws. This question is usually coupled with a demand to know what the point of forming a limited liability company or a closed corporation could possibly be if doing that does not insulate business owners from wage and hour liability.

Because this issue arises so frequently, we’ve prepared a quick primer that we hope sheds light on personal liability for wage and hour violations.

Case Law

In 2010, the California Supreme Court published its decision in Martinez v. Combs, 49 Cal.4th 35 (2010). It holds that IWC Orders govern the definition of “employer” applicable to wage and hour disputes. Under Martinez’s application of prior IWC Orders, to “employ” means “[a] to exercise control over the wages, hours or working conditions, or [b] to suffer or permit to work, or [c] to engage, thereby creating a common law employment relationship.” Id. at 64 (italics in original).

In 2017, the Martinez employment definition was tested in Turman v. Superior Court, 17 Cal.App.5th 969 (2017), in which a plaintiff alleged personal liability against the sole shareholder of a closed corporation (which happened to be a restaurant chain). When sued, the shareholder closed the business, shuttered the restaurants, and withdrew all funds from the company’s accounts. After a bitter fight, the trial court ruled that he could not be held personally liable. The California Court of Appeal reversed that decision by ordering the trial court to apply the Martinez test to the shareholder and, in effect, holding that shareholders of closed corporations can be personally liable for wage and hour violations if they meet the definition of “employer” under Martinez.  Turman at 985-987.

Governing Statutes

Interestingly, there is also a statute that explicitly says individuals are jointly liable.  Cal. Labor Code § 558.1(a)-(c) is that statute:

(a) Any employer or other person acting on behalf of an employer, who violates, or causes to be violated, any provision regulating minimum wages or hours and days of work in any order of the Industrial Welfare Commission, or violates, or causes to be violated, Sections 203, 226, 226.7, 1193.6, 1194, or 2802, may be held liable as the employer for such violation.

(b) For purposes of this section, the term other person acting on behalf of an employer is limited to a natural person who is an owner, director, officer, or managing agent of the employer, and the term managing agent has the same meaning as in subdivision (b) of Section 3294 of the Civil Code.

(c) Nothing in this section shall be construed to limit the definition of employer under existing law.

This was part of the January 1, 2016 “California Fair Day’s Pay Act” funded and lobbied for by the California Employment Lawyers Association. It is even broader than the cases, holding that both an “employer” or any “other person acting on behalf of an employer” may be held liable “as an employer for such violation.” Note also that “other person” is somewhat limited by part (b).

If that was not clear enough, there is another statute that provides that an employer “or other person acting either individually or as an officer, agent, or employee of another person” who pays or causes to pay an employee less than the state’s applicable minimum wage shall be subject to a civil penalty.  Cal. Labor Code § 1197.1(a).

Both statutes were interpreted unfavorably for business owners in September of this year. In Atempa v. Pedrazzani, 27 Cal.App.5th 809 (2018), the California Court of Appeal confirmed that owners of closed corporations can be personally liable for wage and hour violations, and minimum wage violations, under §§ 558.1 and 1197.1(a).  Quoting the summary from the decision itself (Id. at 478):

“Here, the unambiguous language of the statutes at issue applies to Pedrazzani as an ‘other person’ subject to the civil penalties. (§§ 558(a), 1197.1(a).) Contrary to Pedrazzani’s suggestion, the inapplicability of the alter ego doctrine is not a defense to the statutory liability of a party who otherwise qualifies as an ‘other person’ subject to a civil penalty under section 558(a) or section 1197.1(a).”

Conclusion

In other words, the law is settled: even if you are the sole shareholder of a closed corporation accused of wage and hour violations under California law, you may still be exposed to personal liability for those violations.

Time is always of the essence once a threat of litigation is made. If you face such a claim, consult with an attorney immediately.