Court Finds Discretion “May” Not be Judicial
Business owners often incorporate their businesses to help protect personal assets. Under California law, a corporation stands as a separate legal entity and can shield its owners from personal liability for business operations. The protections afforded by incorporation, however, are not absolute. Those doing business in California should be aware that Labor Code Section 558.1 attaches personal liability for minimum wage violations to owners and individual officers involved in employment decisions.
Labor Code Section 558.1
Labor Code section 558.1 specifically provides: “Any employer or other person acting on behalf of an employer, who violates, or causes to be violated, any provision regulating minimum wages … may be held liable as the employer for such violation.”
The discretionary nature of the word “may” previously implied that courts had discretion to decide whether to attach personal liability to individual owners and officers. But in the recent decision of Seviour-Iloff v. LaPaille, (2022) 80 Cal. App. 5th 427 the First District California Court of Appeal concluded that the Legislature’s use of the term “may” does not grant judicial discretion in imposing liability.
On appeal, the parties did not disagree that the word “may” implies a degree of discretion. Rather, they disagreed as to whether such discretion may be exercised by a court or the party prosecuting the action (generally the employees). The Court sided with the employees who argued that the term “may” is granting prosecutorial discretion, rather than judicial discretion. The Court held, “…we interpret the term [may] as reflecting a recognition by the Legislature that the party prosecuting the wage violation may not need to pursue such liability in the event the employer satisfies any outstanding judgment.” The Court further concluded that it was always within the employee’s power to seek personal liability under section 558.1.
In reaching its conclusion, the Court looked to the legislative history behind Labor Code Section 558.1 and found the legislation “‘targets individual officers who are involved in the failure to pay wages’” and “sought to ‘“discourage [such individuals] from rolling up their operations and walking away from their debts to workers and starting a new company.”’” (See Usher v. White (2021) 64 Cal.App.5th 883, 894.) The Seviour-Iloff Court held that allowing courts to excuse such individual liability would undermine the purpose of original legislation, which was essentially to facilitate an employee’s ability to recover unpaid wages.
It is important to note that personal liability is not automatic. A business owner must have “had sufficient participation in the activities of the employer, including, for example, over those responsible for the alleged wage and hour violations, such that the ‘owner’ may be deemed to have contributed to, and thus for purposes of this statute, ‘cause[d]’ a violation.” (Usher, supra, 64 Cal.App.5th at pp. 896–897.) This assessment of an individual’s participation “cannot be determined by any bright-line rule, as this inquiry requires an examination of the particular facts in light of the conduct, or lack thereof, attributable to the [individual].” (Id. at p. 897.)
Owners and operators may find some comfort in recognizing that personal liability may not be necessary if the employee is able to collect his or her alleged unpaid wages from the business itself. However, this case is yet another example of the importance of understanding California’s complex wage and hour laws. Businesses of all sizes need to invest in competent in-house HR and payroll professionals and regularly update policies and practices with the guidance of outside counsel. Unfortunately, expansive personal liability for wage violations is proving to be another example some businesses cite as a reason to move operations away from the Golden State.