California Expands the Scope of Liability Business Owners Can Have for Wage & Hour Violations

In 2016, California enacted the “Fair Days Pay Act”, which greatly expands personal liability for business owners who knew or should have known about wage and hour violations. The notion that one’s business entity (i.e. Corporation, LLC, Partnership) can protect their personal assets from a court judgment is now, in many ways, being trimmed away.

The idea of personal liability for certain individuals in a business is not new. Under the California common law, this is known as the Alter Ego Doctrine whereby a plaintiff can “pierce the veil” of the entity by showing:

1.       A unity of interest and ownership between the corporation [or other entity] and its equitable owner that the separate personalities of the corporation [or other entity] and the shareholder do not in reality exist; and

2.       There must be an inequitable result if the acts in question are treated as those of the corporation [or other entity] alone.

(See Turman v. Superior Court, (2017) 17 Cal.App.5th 969, 980-81).

However, the second factor above can be difficult for a plaintiff to prove – and often the Alter Ego Doctrine arises in cases in which a shell corporation is used to shield liability for wrongdoing that is anticipated or ignored by the owners.

Recognizing this, and desiring to protect against “wage theft”, the California legislature codified the “Fair Days Pay Act” into the California Labor Code as Section 558.1, which reads as follows:

(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 . . . may be held liable as the employer for such violation.

So, what does this mean for employers and people acting “on behalf of” employers?

The short answer is that it is still unclear. Since its enactment in 2016, there has been virtually no case law addressing or interpreting Section 558.1. However, California courts and the Industrial Welfare Commission, through various Wage Orders, both maintain that the definition of “employer” is fairly broad, which tends to support the extended reach of Section 558.1 to individuals acting on behalf of the corporate employer. In plain language, this new law could result in personal liability for owners, directors, officers, and managing agents who violate or cause violations of overtime and minimum wages, improper meal and rest breaks, waiting time penalties, incorrect wage statements, and indemnification statutes.

Now, more than ever, employers must be cognizant of wage and hour violations and potential violations – if not just for the purpose of treating their employees well, then for the purpose of protecting their own, personal assets from an adverse judgment.

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