Metropolitan News-Enterprise


Thursday, April 17, 2008


Page 3


Court Holds Defunct Company’s Principals Not Liable for Unpaid Wages


By SHERRI M. OKAMOTO, Staff Writer


The shareholders, officers, and managing agents of a defunct corporation are not individually liable for the corporation’s failure to pay its employees wages and accrued vacation, the First District Court of Appeal held yesterday.

Div. One, relying on the common law definition of “employer,” said the individual agents of a corporation are not employers for purposes of liability under the Labor Code arising out of the corporation’s failure to pay its employees’ wages. The panel affirmed the lower court’s decision.

Anna Wong, Toha Quan, and Jenny Wong were the owners, officers, and managers of several garment manufacturing corporations which began struggling financially and were unable to meet their payrolls before declaring bankruptcy. Based upon employee complaints, the United States Department of Labor filed suit in the U.S. District Court against the corporations and individual defendants, seeking injunctive and other forms of relief.

The complaint filed by the California Labor Commissioner and a complaint in intervention relied on a provision in the Industrial Welfare Commission wage order applicable to the garment industry that defines “employer” as  “any 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.”

San Francisco Superior Court Judge Ernest H. Goldsmith found Reynolds v. Bement (2005) 36 Cal.4th 1075 precluded the application of the IWC employer definition and that under the common law definition of employer, the individual agents of the corporations were not liable for the unpaid wages.

Justice William D. Stein, writing for the appellate court, noted that neither the term “employer” nor the term “employee” are statutorily defined in the substantive Labor Code provisions that were allegedly violated, as was the case in Reynolds. Accordingly, he concluded: “[A]bsent a clear and unequivocal expression of contrary legislative intent, we must assume the Legislature intended these terms would be interpreted in accordance with the common law.”

However, Stein cautioned that Reynolds was not a “categorical decision that all provisions of the Labor Code using the term ‘employer’ or ‘employee’ must be interpreted in accordance with the common law definitions.”

Relying on Jones v. Gregory (2006) 137 Cal.App.4th 798, Stein concluded that the Labor Code’s reference to IWC orders did not evince a legislative intent to deviate from the common law meaning of “employer” or “employee,” and pursuant to Reynolds, only the corporate entity could be liable for the corporation’s failure to pay its employees.

Further, although Labor Code Sec. 2677 provides that individuals who are alter egos of a corporate employer can be a “deemed . . . employer” and jointly liable for certain wage and hour violations, Stein found no factual basis to find the individual defendants personally liable under this alternate theory of liability either.

Finally, Stein held that the plaintiffs were not entitled to any restitution from the individual defendants under the Unfair Competition Law. He reasoned that the employees had provided their labor to the corporations, not the individual defendants, and the corporations had the duty to pay the wages due to the employees. Absent any contrary evidence, or evidence that the individual defendants had appropriated corporate funds for their personal use, he concluded an order requiring the individuals to pay the unpaid wages would not be “restitutionary,” as it would not replace any money or property that the individuals took directly from the employees.

Presiding Justice James J. Marchiano and Justice Douglas E. Swager joined Stein in his opinion.

The case is Bradstreet v. Wong, A113760.


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