Liability: Why Officers and Owners Weren’t Individually on the Hook for Garment Co.’s Labor Code Violations

In 2001, three San
Francisco garment companies owned, managed, and
operated by Toha Quan and Anna Wong hit on hard times and went out of business.
During the final months of operation, the organizations— Wins of California, Wins
Fashion, and Win Industries of America (collectively, Wins Corporations)— didn’t
pay wages and accrued vacation. The companies filed for bankruptcy, so the
labor commissioner went after Quan, Wong, and director/bookkeeper Jenny Wong to
recover back wages and vacation pay for all employees to whom they were owed.
Now a California
appeals court has ruled that these individuals were not personally liable for
the Wins Corporations’ wage violations. We’ll explain why.

Who Is an Employer?

While this lawsuit was pending, the California Supreme Court
decided the case of Reynolds v. Bement, holding that corporate officers and directors cannot be held
personally liable for the employer’s failure to pay wages, under a Labor Code
provision that authorizes individual employees to file a private lawsuit to
recover unpaid wages. The high court explained that although this Labor Code
section allows an aggrieved employee to sue to remedy an employer’s failure to
pay wages, California
common law has long held that shareholders, agents, and employees acting for
and on behalf of a corporation cannot be held liable for the corporation’s
wrongs.1

The labor commissioner here argued that the Reynolds decision applied only to private lawsuits to recover wages, and
that when the labor commissioner sued to recover unpaid wages and overtime, a
broader definition of employer—one that included any corporate agent who
exercised control over an employee’s wages, including an owner—applied. This
definition comes from the Industrial Welfare Commission (IWC) Wage Orders.

CO N T E N T S

No Personal Liability

But the appeals court rejected the labor commissioner’s argument.2 The court noted that the Labor
Code sections under which the commissioner sued imposed wage obligations on an
employer, just as in the Reynolds
case. According to the court, had the California
Legislature intended for the broader IWC definition to apply, it could have so
indicated in the Labor Code language. Without such direction from the Legislature,
the common law definition of employer is applicable—not the IWC definition.

This case underscores that individual owners, officers, directors, or managers typically cannot be held personally liable for Labor Code wage violations or paying restitution under the UCL. However, there may still be other avenues for imposing liability.

The court also rejected claims that the individuals should be
required to pay back the employees under California’s
unfair competition law (UCL), which imposes restitution as a remedy for unfair
competition practices. Restitution wasn’t an available remedy in this case,
said the court, because the individuals didn’t personally appropriate or
acquire any money from the employees and did not misappropriate Wins Corporations
funds that would otherwise have been used to pay the employees’ wages.

Implications for Employers

This case underscores that individual owners, officers, directors,
or managers typically cannot be held personally liable for Labor Code wage
violations or paying restitution under the UCL. However, there may still be
other avenues for imposing personal liability. For example, in some situations
a corporate officer may be considered the “alter ego” of, or the same as, the
corporation and would be personally liable for the actions of the business. In
the new case,  though, there was no
evidence to suggest that the Wongs or Quan were the Wins Corporations’ alter
ego.

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1 Reynolds v. Bement,
Calif. Supreme Court No. S115823,
2005

2 Bradstreet v. Wong,
Calif. Court of Appeals (Dist. 1)
No. A113760, 2008