In most instances, corporate officers cannot be held personally liable for the misconduct of the company they serve. However, there are occasions when corporate officers can be held personally liable in their individual capacities for corporate acts or omissions. A recent decision by a California intermediate appellate court held that an individual who served as a company’s CEO and CFO can be held liable for the claimants’ unpaid wages. As discussed below, the ruling represents an interesting example of the circumstances in which individuals can be held liable for company misconduct. A copy of the California Court of Appeal’s June 28, 2022 decision can be found here. A July 21, 2022 post on The CorporateCounsel.net blog about the decision can be found here.
Bridgeville Properties, Inc. (BPI) is a property owner in Humboldt County, California. Cynthia LaPaille served as BPI’s CEO and CFO. Elsie Seviour-Iloff and Laurance Iloff reached an agreement with LaPaille that they would provide certain services to BPI in exchange for free rent. The two individuals provided the service pursuant to this agreement for a period of time, but then the individuals had a falling out with LaPaille.
The individuals filed a claim against BPI and LaPaille with the California Division of Labor Standards Enforcement for unpaid wages during the time when they provided the services to BPI. The Labor Commissioner ruled in the individuals favor and BPI appealed to the superior court. The superior court ruled that the claimants were entitled to unpaid wages but did not impose personal liability on LaPaille. The claimants filed an appeal to the intermediate appellate court, arguing among other things that the superior court erred in declining to impose personal liability on LaPaille.
The provision of the California Labor Code relating to the question of personal liability appears in California Labor Code Section 558.1, which provides that “(a) 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.” Section 558.1 defines a “person acting on behalf of an employer” as “a natural person who is an owner, director, officer, or managing agent of the employer.”
The June 28, 2022 Opinion
In a June 28, 2022 opinion written by Justice Sandra Margulies for a unanimous three-judge panel, the intermediate court ruled, among other things, that the “trial court erred in declining to impose personal liability.”
In concluding that the trial court erred on the personal liability question, the appellate court first determined, contrary to the defendants’ argument, that Section 558.1 did create a private right of action for unpaid wages.
The appellate court then turned to interpreting the word “may” in the provision’s final clause. The defendants argued that the word “may” gives courts discretion in making an award for unpaid wages, whereas the claimant argued that the word “may” merely gives the claimant the right to seek the remedy.
The court agreed with the claimants that the provision gives parties the right to enforce the unpaid wage liability against those an individual who “violates, or causes to be violated” the minimum wage laws, adding that such liability may not be necessary if the employee is able to collect his or her unpaid wages from the employer. The court added that “allowing courts to excuse such individual liability would undermine the purpose of Section 558 – to facilitate an employee’s ability to recover unpaid wages.”
Without reaching the issue in this specific case, the court noted prior appellate court authority that a person can be deemed to have “caused” a Labor Code violation through personal involvement in the violation or through having “sufficient participation in the activities of the employer, including, for example, over those responsible for the alleged wave and hour violations, such that the [individual] may be deemed to have contributed to, and thus for purposes of this statute, caused a violation.” The court noted in a footnote that LaPaille did not argue that she did not “violate or cause to be violated” a minimum wage provision. The appellate court noted further that evidence in the trial court record “demonstrates” LaPaille’s involvement in the wage violations.
This appellate court decision is less that satisfying to read for a number of reasons including the fact that the underlying facts are kind of a mess. The messiness of the factual background makes the court’s decision seem less than instructive.
Nevertheless, there are important things going on here. The starting point for me is the rudimentary principle of corporate law that corporations are separate from the individuals who run them (and also, although not relevant in this context, separate from the individuals who own them). Nevertheless, as this case demonstrates, there are circumstances where individual officers can be held personally liable for their company’s misconduct or wrongdoing.
There are other circumstances where individual officers can be held personally liable for corporate wrongdoing. One example is when individuals are held liable under the “responsible corporate officer” doctrine, a principle that is most often applied in the health, safety and environmental context. Interestingly, the word “responsible” in the expression “responsible corporate officer” doctrine is not meant to suggest that the individual is “responsible” for the conduct, but only that the individual is “responsible” for the corporation.
The principles applied by the California appellate court here are slightly different. Here, the court said that the corporate offices can be liable for unpaid wages not merely because they are corporate officers, but rather because the individual to be held liable “caused” a violation of the wage laws, either through personal involvement in the violation or through “sufficient participation” in the activities of the employers (such as through supervision of those responsible for the violations).
In this case, the respondent did not contest that she violated or caused to be violated the minimum wage laws. Whether and when others might be held liable is not crystal clear; as the Arnold & Porter law firm said in a recent memo about the California appellate court’s opinion, “there is no bright line rule for determining whether an individual is potentially liable for wage-and-hour violations by an employer.” The bottom line, however, is that under certain circumstances individual officers of corporate employers subject to California wage laws can be held personally liable for unpaid wages.
The possibility of personal liability immediately raises the question of insurance. The typical Employment Practices Liability policy expressly excludes coverage for loss arising from wage and hour violations; while some policies do provide sublimited defense cost only coverage for wage and hour violations, that coverage extension would not apply to the unpaid wages. D&O insurers also would be likely to contest coverage for unpaid wages on a number of grounds, including on the ground that the unpaid wages do not represent covered loss.