An Inherent Danger in the Poverty Defense to a PAGA Representative or Wage and Hour Class Action
An Inherent Danger in the Poverty Defense to a PAGA Representative or Wage and Hour Class Action

Plaintiff attorneys have deluged the courts with wage and hour class actions and PAGA lawsuits.  The first question an employee advocate asks of their potential client is, “can I see a pay stub?”  Instead of agreeing to represent employees for their harassment or wrongful termination claim, they convince the disgruntled ex-employee to act as a representative for a PAGA or class action for improper wage and hour practices. 

This practice has blossomed into a cottage industry in which plaintiff attorneys are more focused on quick expensive settlements rather than drawn out litigation.  Because of the potential stacking of penalties and the difficulty of maintaining compliant policies and practices, employers are faced with claims of multi-million dollar potential liability.  As a result, many employers claim at mediation that these astronomical liability claims would put them out of business.  However, the parties typically reach resolution at an unpalatable figure that allows the company to continue in business.  

On occasion a business takes the position that it would be easier to file for bankruptcy protection than agree to a crippling settlement.  At first blush this may appear like a good idea, because the employee’s attorney and their client can stand in the back of the line with all the other unsecured creditors and receive either pennies on the dollar or nothing at all.  The problem is Labor Code section 558.1 which explicitly targets owners, directors, officers, or managing agents. 

The first published California case to address how this law is to be applied was Usher v. White, 64 Cal. App. 5th 883 (2021), where the court found an owner not personally liable.  The court set forth a test that to be personally liable, one must be personally involved in the violation of the Labor Code, or alternatively, must have sufficient participation in activity of the employer, like supervising those responsible for the alleged violation of the Labor Code.  This case dealt with service technicians who were categorized as independent contractors.  Because the owner was not consulted in the reclassification, nor did she provide any guidance regarding reclassification, was not involved in hiring, and did not create, draft, or contribute to independent contractor agreement, she was held not personally liable.

The next court to address this issue came to a different conclusion.  In Espinosa v. Hepta Run, Inc., 74 Cal. App. 5th 44 (2022), the court found the owner liable. The court acknowledged that just being an owner alone is not sufficient to create individual liability.  The owner claimed he was not involved in the daily operation (with which the trial court did not agree), and the owner claimed he was not involved in the creation of policies.  The court found the mere approval of a policy that violates the Labor Code is sufficient for owner liability.  The court concluded that an owner must engage in some affirmative act beyond the status of being an owner to be liable.  The affirmative act does not require being involved in day-to-day operations of the company, nor does it require the owner to be the author of the challenged employment policies.  Rather, the owner must have some oversight of the company’s operations or some influence on corporate policies that results in Labor Code violations. Thus, absentee owners may not be held personally liable. 

On the other hand, if an owner is involved in the day-to-day operations and makes decisions either implementing or approving employment policies, the owner can be held personally liable.  In short, the more involved an owner is in a business, the more likely such an owner could have personal liability.  The idea behind Labor Code section 558.1 is to prevent employers from shuttering a business, failing to pay employees what they are owed, and starting a new business.  Accordingly, plunging a business into bankruptcy might not resolve the problem for a small business.  

Another tactic open to business owners is to challenge the appropriateness of a private right of action under Labor Code section 558.1.  While there is some question about whether such a claim must be brought by the government rather than an individual employee, courts have not yet opined on this potential defense.  However, given recent California court decisions, the likelihood of this defense prevailing is unlikely.

Clients with questions regarding this post may reach out to the author or their usual employment law counsel at AALRR.

This AALRR post is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.  © 2023 Atkinson, Andelson, Loya, Ruud & Romo

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