Although some states have long imposed personal liability on officers and directors for unpaid wages, the laws in both California and New York have recently been amended to address personal liability.  This update addresses California’s Fair Day’s Pay Act (SB 588) which became effective on January 1, 2016. 

The Fair Day’s Pay Act (the Act) provides that some individuals—described as owners, directors, officers or managing agents in the new law—can be held personally liable as the employer for certain wage and hour Labor Code violations. Cal. Lab. Code § 558.1. 

Additionally, the Act gives the state Labor Commissioner more tools to collect unpaid wages from employers and individuals.  Cal. Lab. Code §§ 96.8, 98, 238.1.  It authorizes the Labor Commissioner to file a lien on real estate, or a levy on an employer’s property, or impose a stop order on an employer’s business in order to assist an employee in collecting unpaid wages where there is a judgment against the employer.  Cal. Lab. Code §§ 238.2 and 238.3. 

The Act also allows for the imposition of criminal liability for the failure of an employer, owner, director, officer or managing agent of the employer to obey a stop order.  Cal. Labor Code Section 238.1.  Individuals can be charged with a misdemeanor punishable by imprisonment in county jail not exceeding 60 days or by a fine not exceeding ten thousand dollars or both. 

The Act also addressees two specific industries (property services and the long-term care industry) and provides that  any individual or business that contracts for such services is jointly and severally liable for unpaid wages.  Cal. Labor Code § 238.5.  The property services industry is defined to include janitorial, security guard, valet parking, landscaping and gardening services. 

The legislative history provides background for the Act; it begins with a discussion of wage theft which is defined as “a term used to describe labor law violations such as not paying an employee minimum wages or overtime, not paying for off-the-clock work, tip-stealing, and not paying final wages.”  April 20, 2015 Senate Judiciary Committee Bill Analysis.  California Labor Commissioner Julie Su has stated publicly that she intends to seek, and indeed is seeking, enforcement of the criminal provisions against those employers who commit “wage theft,” which Ms. Su appears to interpret in the same manner as described in the Act’s legislative history.  Further, the legislative history explains that the Act “will discourage business owners from rolling up their operations and walking away from their debts to workers and staring a new company.”  Id. 

Labor Code Section 558.1 Liability

Under Labor Code section 558.1, anyone who is an owner, director, officer or managing agent of an employer and who violates the Labor Code, or causes it to be violated, “may be held liable as the employer for such violation.”  Individuals may face potential liability for the following:

1. Unpaid minimum wages;
2. Unpaid overtime wages, including miscalculations of the regular rate;
3. Waiting time penalties if all wages are not timely paid at the end of employment;
4. Providing wage statements that do not meet all nine of the requirements of Labor Code section 226;
5. Rest and meal period premiums for missed or unavailable breaks; and
6. Unreimbursed business expenses.

Defining Owner, Director, Officer or Managing Agent

Out of the four terms “owner, director, officer or managing agent,” the Act defines only one of them.  Specifically, it defines “managing agent,” based on section 3294 of the Civil Code.  According to California courts that have interpreted section 3294, “managing agents” are employees who exercise substantial discretionary authority over decisions that ultimately determine corporate policy. 

The other three terms are not defined in the Act.  Without a definition, courts will have to look at how the terms are used in other contexts.  For example, the terms “director” and “officer” may involve courts looking to how the terms have been interpreted in other Labor Code contexts where California courts defined the terms “director” and “officer.”

There is no guidance on the meaning of the term “owner” in the Act.  Without a definition, the term “owner” may have to be interpreted in a case-by-case basis by the courts.  Courts called on to define this term might examine how it is used in other contexts, which may depend upon the type of business organizations involved.  In California, there is no statutory law and, it appears,  no common law that would provide clear guidance for the definition of owner as it would relate to individual liability under the Act.  Courts may look to how other states address the term or concept, if at all, but again there is no clear guidance.  For example, the New York statute does not use the term owner but instead focuses on the “ten largest shareholders.” 

Scope of Liability of Owners, Directors, Officers or Managing Agents

Labor Code Section 558.1 uses the term “may be liable as the employer” to reference  individual liability, suggesting that courts have discretion to decide when individuals—rather than business organization “employers”—should be held personally responsible for wage violations.  It is uncertain how courts will exercise their discretion.  It is possible that individuals may be liable only when the business entity employer is unable to pay the wages and cure the violation in the first instance. 

Expected Challenges and Recommended Responses by Employers

Although the Act is expected to be challenged in court, including potential constitutional challenges such as vagueness and lack of notice, we encourage all employers to engage counsel to assist with auditing pay practices to minimize risk of personal liability exposure for owners, directors, officers or managing agents.  It is important that internal audits be directed by outside counsel to ensure the protection of attorney-client privilege and work product, as may be applicable, to the audit and remedial assessment and decisions.  Employers should also review their insurance policies to determine whether owners, directors, officers and managing agents are appropriately protected, and whether additional coverage is needed or available.  Counsel should also be consulted for advice and information regarding insurance coverage.

© 2016 Perkins Coie LLP