William Gregory was the
founder and chief executive officer of Science Adventures, an Orange County-based
company that presented science camps for elementary age children. After 20
years of growth, the company had 40,000 enrollees nationwide and annual revenues
of $10 million. Gregory was intimately involved in the company’s day-to-day
operations, responsible for such matters as hiring, firing, setting wage rates,
and signing checks.
The company ran into
cash flow problems, leaving hundreds of instructors and administrators unpaid.
In a series of memos to all employees, Gregory recounted the company’s funding
status and its inability to pay wages. He invited any employee to settle his or
her unpaid wage claim for 75 percent of the total owed by signing a release.
In the meantime, Gregory
relinquished control of Science Adventures to an investment group, which went
bankrupt a year later. Science Adventures, however, remained in operation, with
Gregory as the CEO.
Join us this fall in San Francisco for the California Employment Law Update conference, a 3-day event that will teach you everything you need to know about new laws and regulations, and your compliance obligations, for the year ahead—it’s one-stop shopping at its best.
DLSE Seeks Back Wages
Soon after, the California
Division of Labor Standards Enforcement (DLSE), which is the labor
commissioner’s enforcement arm, sued Gregory and Science Adventures for back
wages owed to 45 of the company’s former
employees. The agency sought to recover more than $100,000 in unpaid wages, pay
for vested vacation time, unreimbursed employee business expenses, waiting time
penalties, and interest.
Gregory balked, arguing that
he could not be considered an “employer” responsible for paying wages. He
pointed to a recent California Supreme Court ruling1 that found corporate
officers could not be held personally liable for unpaid wages under Labor Code Section
1194—which authorizes a private suit (one that an employee files) to recover
unpaid wages—or under the state Industrial Welfare Commission wage orders and
prior case law. That case, however, didn’t determine whether the DLSE itself,
on an employee’s behalf, could go after a corporate officer for unpaid wages.
Corporate Officer Isn’t
an Employer
Now a
question, siding with Gregory.2 First, the court said that even though the DLSE here relied on a
number of Labor Code provisions other than Section 1194, the same analysis
still applied to preclude personal liability for a corporate agent. Second, the
filing of this lawsuit by the DLSE rather than by an employee in his or her
private capacity didn’t change the result.
The court did note,
though, that there could be other avenues for holding a corporate officer
individually liable. Although as yet untested, the so-called Sue Your Boss
law—which took effect in 2004—may provide a mechanism for recovering unpaid
wages from an employer or “anyone acting on behalf of an employer.” However,
the complaint in the present case arose
before this new law
became effective.
Further, said the
appeals court, in some situations, corporate officers may be considered an
“alter ego” of the company and therefore personally liable for actions of the
business. The court remanded the suit to a trial court to determine whether
Gregory could be considered an alter ego of Science Adventures—which is still in
business—because of his intensive involvement in running the company.
3
Decision’s Impact
This ruling chalks up
another win for corporate higher-ups on the issue of individual liability for unpaid
wages. But this doesn’t mean that corporate officers and directors can let
their guard down when it comes to strictly complying with
court pointed out, even though there’s no individual liability under many Labor
Code provisions, there could still be mechanisms—such as the expansive Sue Your
Boss law—by which an employee or the DLSE could come after an individual corporate
agent for unpaid wages.
Another point to note:
Although Gregory offered employees 75 percent of their back pay in exchange for
a release of claims,
law doesn’t permit waivers of unpaid wages. And federal law permits the waiver
and settlement of wage claims, but only when done under the supervision of the
U.S. Department of Labor or a court.
You can link to this
decision online at www.courtinfo.ca.gov/opinions/.
_
1 Reynolds v.
Supreme Court No. S115823, 2005
2 Jones v.
Court of Appeals No. G030347, 2006
A L I F O R N I A W A G E & H O U R A D V I S O R