Back in 2015, the California Legislature enacted Labor Law Section 558.1, making an “other person” acting for an employer (defined as any natural person who is owner, director, officer, or managing agent of the employer) who causes the employer to violate the state’s wage and hour laws liable as the employer for the violation. As I noted at the time, this new statutory provision, which created personal liability for individuals for the employer’s wage law obligations, was quite controversial. However, as noted in a December 21, 2018 post on the Sheppard Mullin law firm’s Labor & Employment Law Blog entitled “Managers Beware: Can You Be Held Personally Liable for Wage and Hour Violations” (here), a California appellate court recently confirmed that “even in the absence of this new section, the labor code imposes personal liability” for California minimum wage and overtime violations.
The case in question arises out of a claim brought by two former employees of Pama, a company doing business as Via Italia Trattoria in Encinitas, California. The employees sued Pama and its owner, Paolo Pedrazzani, alleging that while they were employed at the restaurant, the defendants failed to pay overtime wages, failed to pay minimum and regular wages, and failed to timely furnish wage statements. After a bench trial, the court awarded the plaintiffs civil penalties of $30,000, attorneys’ fees of $315,014, and interest. The defendants appealed. While the case was on appeal, Pama filed for bankruptcy and the appeal proceeded solely as to Pedrazzani.
The lower court had awarded the penalties against Pedrazzani under Sections 558(a) and 1197.1(a) of the California Labor Code. Section 558(a) provides that an employer “or other person acting on behalf of an employer” who violates or causes a violation of the state’s applicable overtime laws shall be subject to a civil penalty. Section 1197.1(a) provides that an employer “or other person acting either individually or as an officer, agent, or employee of another person” who pays or causes to pay an employee less that the state’s applicable minimum wage shall be subject to a civil penalty.
On appeal, Pedrazzani did not argue that he was not an “other person” who could be held liable under these statutory provisions. He also did not argue that the factual record did not support the conclusion that he had “caused” the non-payment or insufficient payment of minimum wage and overtime pay. Rather, he argued that notwithstanding the statutory provisions, he could not be held liable as an individual for a wage and hour law violation of the corporation in the absence of any showing that he acted as the alter ego for the corporation, acted fraudulently, or otherwise acted in a way to justify the piercing of the corporate veil.
In a September 28, 2018 opinion (here) written by Judge Joan Irion for a unanimous three-judge panel of the California (Fourth Appellate District) Court of Appeal affirmed the district court’s rulings. The appellate court specifically rejected Pedrazzani’s arguments based on the existence of the corporate form, holding that the statutory provisions allowed the penalties to be imposed on an “other person” who “caused” the amounts to be paid or underpaid, regardless of the identity or of the business structure of the employer.
As the authors of the blog post to which I linked above noted, the employers and all owners, directors, officers, and managing agents of employers should be aware that “individuals may be held personally liable for civil penalties if they violate, or cause to be violated, certain wage and hour laws.” Accordingly, the authors noted, “employers should ensure that their wage and hour practices comply with the applicable laws to keep personal liability to a minimum.”
The blog post authors also noted that under relevant California statutory provisions, employees sued in connection with conduct in the course of their employment are entitled to be defended and indemnified; in Pedrazzini’s case, however, the employer filed for bankruptcy after the initial judgment, so, as the appellate court affirmed, he was personally liable for the entire amount of the judgment.
Although there are undoubtedly alarming aspects of this decision for any corporate executive, official, or employee, it is important to keep in mind that the California statutes do not impose liability on corporate officials or employees based on their status alone; the individuals can only be held liable if the failed to pay or caused the failure to pay amounts due under the California wage and hour laws. The clear first line risk management defense is for all concerned to avoid causing a violation of the California labor laws.
The existence of personal liability and the possibility for the unavailability of indemnification does raise the question about the availability of insurance for this kind of exposure. The typical Employment Practices Liability Policy includes an exclusion for claims arising out of alleged violation of federal and state wage and hour laws. Some policies will include a modest sublimit (usually in the range of $100,000 to $250,000) for defense expense, but the sublimit would provide no protection for the amounts awarded against Pedrazzini here.
Before thinking about possible other insurance solutions to this exposure, there are a couple of things about this situation that need to be kept in mind. The first is that the statutory amounts awarded against Pedrazzini (other than the attorneys’ fees and interest) were expressly in the form of penalties. The typical management liability will usually expressly exclude from the definition of Loss that is covered under the policy “fines, penalties, and amounts deemed uninsurable under applicable law.” So there is this fundamental structural problem that could complicate any efforts to find an insurance solution.
There is an additional California law issue that could also complicate efforts to find a solution. That is, Section 533 of the California Insurance Code expressly prohibits insuring liability for willful misconduct. I don’t know enough to be able to discern whether or not attempts to insure for “causing” a violation of the California Wage and Hour laws would run afoul of this statutory limitation on insurance, but I think it is important to note this issue as an additional possible concern.
With all of those concerns duly noted, I wonder whether or not there is a way to address the potential personal liability of corporate individuals under the California Wage and Hour laws as part of a D&O policy’s Side A coverage, or as part of the coverage under a separate Excess Side A DIC policy. The possibility of a Side A solution seems natural given that the greatest concern here is the possibility of personal liability in circumstances (for example, bankruptcy) when indemnification is not available.
A full exploration of the Side A issues is beyond the scope of this blog post. For now, I think the point is that this is a concern that those of us in the D&O space need to be aware of and need to be thinking about, as it clearly represents a serious concern. I welcome readers’ thoughts, and I hope everyone will feel free to weigh in using the blog’s comment feature.