Officers and Directors Avoid Wage Liability

Applying the California Supreme Court decision in Reynolds v. Bement (2005) 36 Cal.4th 1075 to actions in which the Labor Commission is the plaintiff, the Court of Appeal has upheld a trial court decision in favor of the officers and directors of a corporation that had failed to pay wages to its employees.

In Bradstreet v. Wong (2008) __ Cal.App.4th __ (formerly entitled Lujan v. Wong), as action by the Labor Commissioner to collect wages due to employees of three San Francisco garment manufacturing companies, the complaint relied exclusively on a provision in the Industrial Welfare Commission (IWC) wage order applicable to the garment industry that defines “employer” as: “[A]ny person as defined in Section 18 of the Labor Code, who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person” (Cal. Code Regs., tit. 8, § 11010, subd. 2(F)). The Commissioner alleged that defendants employed or exercised control over the wages, hours, and working conditions of the corporations' employees and therefore were personally responsible for the unpaid wages. No proof was submitted that allowed the Commissioner (or the employees themselves) "pierce the corporate veil." The defendants did not make personal use of corporate assets, or commingle personal and corporate assets; the corporations were not inadequately capitalized; the defendants had “put far more personal funds into the corporations in the form of capital infusions and loans than were alleged to have been improperly taken out;” and the mere fact that the corporations ultimately "went broke” did not establish that the corporations were undercapitalized.

The Commissioner argued that Reynolds is distinguishable because the judicial proceedings were initiated by employees under Labor Code § 1194, whereas here, the Commissioner filed suit on the employees’ behalf pursuant to Labor Code § 1193.6. That argument had also failed in Jones v. Gregory (2006) 137 Cal.App.4th 798. The court held, "for reasons similar to those stated in Jones, supra, 137 Cal.App.4th 798, that the mere reference in section 1193.6 to 'the orders of the commission' does not evince a clear and unequivocal legislative intent to depart from the established common law meaning of these terms." The court's reasoning was threefold:

First, the plain language of section 1193.6 does not support the Commissioner’s construction because the phrase “orders of the commission” does not modify, qualify or otherwise define the word “employee.” Instead, it modifies “unpaid minimum wages or overtime compensation” that are owed “under this chapter or the orders of the commission.” The reference to the “orders of the commission” merely makes explicit that, in addition to statutory provisions of “this chapter,” the IWC orders contain regulations establishing overtime exemptions (§ 515) and fixing the minimum wage (§ 1197) that are relevant to determining whether minimum wages and overtime compensation are “owed” (§ 1193.6).

Second, both before and after the enactment of section 1193.6, when the Legislature has intended to deviate from the common law that insulates corporate agents from personal liability for obligations or duties imposed on the corporate employer, it has done so explicitly. For example, section 1199, enacted in 1937, imposes misdemeanor criminal liability on “[e]very employer or other person acting either individually or as an officer, agent, or employee of another person” for violation “of this chapter or any order or ruling of the commission.” (Stats. 1937, ch. 90, § 1199, pp. 217-218, italics added.) Section 1175, also enacted in 1937, imposes criminal liability on “any person, or officer or agent thereof.” (Stats 1937, ch. 90, § 1175, p. 214, italics added.) The Legislature continued to use similar language when, in 1983, it enacted section 1197.1, to specify that a civil penalty for minimum wage violations may be imposed on “[a]ny employer or other person acting either individually or as an officer, agent, or employee of another person. . . .” (Stats. 1983, ch. 1145, § 1, italics added; see also § 1199.5 [“Every employer or other person acting either individually or as an officer, agent or employee of another person” is guilty of a misdemeanor for certain violations].) The absence of any similar language in section 1193.6 further bolsters our conclusion that the mere reference to “orders of the commission” does not evince any legislative intent to deviate from the common law meaning of “employer” or “employee.”

We also note that section 1197.1, like section 1193.6, includes a reference to “an order of the commission.” If the mere reference to “an order of the commission” meant the Legislature intended the term “employer” to include a corporate employer’s agents, the phrase “or other person acting either individually or as an officer, agent, or employee of another person” would be unnecessary surplusage. (See People v. Cole (2006) 38 Cal.4th 964, 980-981 [statutes should not be construed to render a part surplusage].)

The court also rejected alternative theories including the claim that the defendants could be held personally liable as “deemed” employers pursuant to Labor Code § 2677, and claims under the Unfair Competition Law. You can download Bradstreet v. Wong here in pdf or word format.

[Update] This case is related to the sweatshop case against Jimmy Quan, et al., discussed in previous posts, including this one.

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