INDIVIDUAL MANAGERS DON?T FACE LIABILITY FOR OVERTIME VIOLATIONS
By Richard S. Rosenberg and John J. Manier

California courts generally have held that managerial employees cannot be held personally liable for decisions they make on behalf of the employer. See, for example, Reno v. Baird, 18 Cal.4th 640 (1998). The 2nd District Court of Appeal recently extended this principle to the state?s wage-and-hour laws.

In Reynolds v. Bement, 2003 DJDAR 3705 (Cal.App. 2nd Dist. Apr. 2, 2003), the court affirmed the dismissal on demurrer of Shawn Reynolds? class-action claims against several officers and directors of Earl Scheib Inc. The company allegedly implemented illegal wage and hour policies to the detriment of Reynolds and other employees. The court held that only the employer can be liable for such alleged violations.

Reynolds formerly worked as a manager at a Scheib automobile paint shop. He claimed to represent a class of all persons employed as managers and assistant managers at Scheib's 54 statewide shops since March 1996.

Reynolds' amended complaint alleged that Scheib and its officers, directors and agents intentionally misclassified class members as exempt from overtime pay laws and required them to work over eight hours per day and 40 hours per week without paying overtime. Reynolds also claimed that these defendants made illegal deductions from class members' paychecks based on purported clerical and calculation errors, late-filed paperwork, cash shortages and returned customer checks.

Reynolds asserted 13 causes of action against eight of Scheib's officers and directors and 14 claims against Scheib. On appeal, 10 claims were at issue: failure to pay overtime compensation (Labor Code Sections 510, 1194 and applicable state wage orders); unlawful deduction of wages; conversion; falsely denying the amount of wages owed (Labor Code Section 216); failure to keep records of hours worked (Labor Code Sections 1174-1175); requiring employees to work under prohibited conditions of labor (Labor Code Section 1199]; negligence per se; negligence; violation of the Unfair Competition Law, Business & Professions Code Sections 17200 et seq.; and declaratory relief.

The individual defendants demurred to all claims against them. Scheib joined the demurrer as to several claims. The Los Angeles Superior Court sustained the demurrer in its entirety. It granted leave to amend on some claims, but Reynolds declined to amend and appealed from the judgment in favor of the individual defendants. The trial court stayed the action against Scheib pending appeal and has not ruled on class certification.

As the Court of Appeal noted, under the common law, employees could sue for unpaid wages against the employer but not the employer's agents. Reynolds argued that the Industrial Welfare Commission abrogated this rule when it issued Wage Order 9, which applies to Scheib's automobile painting business.

Wage Order 9 broadly defines "employer" as "any person as defined in [Labor Code Section 18] who directly or indirectly, or though an agent of any person, employs or exercises control over the wages, hours, or working conditions of any person." Reynolds argued that management employees fall under this definition and therefore may be held personally liable for unpaid wages.

The court disagreed. It found that this definition of "employer" does not pertain to civil liability for overtime wages but instead draws a distinction between "employers" and "employers and their agents." Whereas "employers and their agents" must to pay civil penalties and misdemeanor fines, the Legislature has determined that only "the party 'employing labor'" faces civil liability for failing to comply with wage-and-hour laws.

In particular, the court noted that only the "employer" must pay damages for violating Labor Code Sections 510 (overtime pay), Section 1197.5 (sex bias in wage payments), Sections 204b and 205 (establishing regular paydays), Section 207 (posting notices of paydays and time and place of payment) and Sections 208 and 209 (payment in case of discharge or strike). By contrast, employers, agents and other persons who violate such requirements must pay civil penalties and fines. See Labor Code Sections 210, 215, 225.5, 553.

The court was persuaded especially by Labor Code Section 1194, which "specifically authorizes an employee to bring a civil action for overtime wages, [but] does not enumerate persons, agents, managers, superintendents, or officers as parties who may be liable in a private civil action."

The court also relied on Reno, where the state Supreme Court held that an employer's individual managers and supervisors cannot be held liable as "employers" for discrimination under the Fair Employment and Housing Act, Government Code Section 12926(d). Notably, the act's definition of "employer" -- "any person regularly employing five or more persons, or any person acting as an agent of the employer" -- is similar to the corresponding definition in Wage Order 9.

By contrast, Government Code Section 12940(j) specifies that any "employer or person" may be liable for harassment and illustrates that the Legislature has used express statutory language when it has imposed civil liability on managerial employees. In the wage-hour context, however, the clear statutory language makes individual managers potentially responsible only for penalties and fines, not for damages in civil lawsuits.

Reynolds sought refuge in Bureerong v. Uvawas, 922 F.Supp.1450 (C.D. Cal. 1996), which predicted that California courts would focus on "economic realities" in determining whether an "employment relationship" exists. Some federal courts have used this test in construing the definition of "employer" in the Fair Labor Standards Act, 29 U.S.C. Section 203(d).

However, the Reynolds court cautioned that the federal definition of "employer" -- "any person acting directly or indirectly in the interest of an employer in relation to an employee[]" -- could be construed as "much broader" than the definition in Wage Order 9. "Most crucially," the court noted that Bureerong did not address whether individual managers may be held personally liable for wage-and-hour violations and instead only "concerned the employer status of corporate entities."

The court found that even if the "economic realities" test was applied, Scheib's management still would not be "employers" for purposes of individual liability. As such, the court was unpersuaded by the contrary conclusion of counsel for the Division of Labor Standards Enforcement, who relied on Bureerong in an advisory letter cited by Reynolds.

Reynolds also cited Frances T. v. Village Green Owners Association, 42 Cal.3d 490 (1986), for the proposition that a director who causes the corporation to commit tortious conduct may be personally liable if the director personally directed or participated in that conduct. However, the court noted that to survive demurrer, a complaint must allege specific acts by the director "which constituted affirmative direction, sanction, participation, or cooperation in the alleged tortious act" of the corporation.

Reynolds' complaint alleged that the individual defendants forced class members "to work long overtime hours without overtime pay" and exercised control over these employees' wages, hours and working conditions. Reynolds further alleged that the individual defendants intentionally conspired to violate applicable Labor Code provisions and wage orders.

However, the court held that such allegations were insufficient to give notice of facts showing that any individual defendant actively participated in specific, tortious acts. On this basis, the court rejected Reynolds' claims against the individual defendants for failure to pay overtime and unlawful deductions.

The court further found that Reynolds failed to state a claim for conversion, which the law defines as "the wrongful exercise of dominion over the property of another." In particular, the class members could not assert an "undisputed ownership right" to overtime wages, nor did Reynolds even allege that the individual defendants had "personal possession of the wages or power to deliver" them to the class.

Reynolds also argued that the Labor Code misdemeanor and public policy statutes created "new rights" that entitled him to bring civil claims based on each violation. The court disagreed, noting that Labor Code Section 216 essentially prohibits fraud and that Sections 1174, 1175 and 1199 are based on negligence -- theories on which common-law actions already exist.

The court likewise rejected Reynolds' reliance on Evidence Code Section 669, "which presumes the failure of a person to exercise due care if he violates a statute of a public entity." This statute only establishes a standard of care, not a legal duty.

Nor was the court convinced that officers and directors may be held personally liable as "employers" under the Unfair Competition Law or that the individual defendants personally participated in conduct that would violate the law. In addition, Reynolds did not make the required allegation that "members of the public are likely to be deceived" by the defendants' conduct. Because Reynolds did not state any actionable claim against the individual defendants, his declaratory relief claim failed as well.

Although the individual defendants in Reynolds were officers and directors, the result in this case should apply to other managerial employees as well. Indeed, lower-level managers are even less likely to direct or participate actively in a corporation's tortious acts and are less amenable to being held liable on statewide class-action claims due to the requirement of common questions of fact and law. See TJX Cos. Inc. v. Superior Court, 87 Cal.App.4th 747 (2001).

NOTE: After this article was published, on July 23, 2003, the California Supreme Court granted review in Reynolds. Consequently, the Court of Appeal?s decision in Reynolds has been superseded and cannot be cited as precedent.