Company Executive Could Be Personally Liable for Unpaid Wages

​The chief executive officer and chief financial officer of a company that owned rental property in California could be held personally liable for the company's failure to pay wages to two tenants who were performing jobs on the property in lieu of rent, a California appeals court ruled.

Between 2009 and 2016, one tenant kept the water system running, dealt with the weeds and provided general handyman services, while the second tenant served as the property manager. The tenants received no wages for their work, but they paid no rent during this time. 

After the company terminated the arrangement with the tenants, they filed claims for unpaid wages with the California Division of Labor Standards Enforcement (DLSE) against the company and against one of its executives, who served as the both the CEO and CFO.

The labor commissioner conducted a hearing on the claims. He concluded that the executive and the tenants had entered into oral employment agreements, pursuant to which the tenant who acted as the property's handyman worked an average of four hours per day, while the property manager worked an average of 10 hours per day. 

The labor commissioner further concluded that the tenants were entitled to recover regular and overtime wages, and that the executive was personally liable for those amounts. 

The company and the executive appealed to the superior court. 

Following a trial, the superior court concluded that the tenants were company employees and that the tenant who served as property manager was entitled to unpaid minimum wages for 20 hours per week, while the tenant who performed handyman services on the property was entitled to unpaid minimum wages for five hours per week. The court ruled, however, that the executive could not be held personally liable for the company's failure to pay wages.

The tenants appealed.  

Individual Liability Under California Labor Code

Under California Labor Code Section 558.1, the owner, director or managing agent of a company may be personally liable for wage and hour violations if that person, on behalf of the company, violates or causes to be violated state wage and hour laws.

The term "managing agent" includes corporate employees who exercise substantial independent authority and judgment in their corporate decision-making and whose decisions ultimately determine corporate policies.

The executive contended that Section 558.1 did not authorize individuals to go to court to seek damages but, rather, that the statute intended enforcement to be solely by a state administrative agency.  

The appellate court rejected this claim. The court noted that the statute did not provide for exclusive enforcement by an administrative agency. While the labor commissioner is empowered to enforce California's labor laws, the legislature also has provided California employees a private right of action to vindicate unpaid wages, the court said. The court noted that under another provision of the labor code, any employee receiving less than the legal minimum wage is entitled to "recover in a civil action" the unpaid wages due.

Further, the legislative history supported the tenants' interpretation, the court said, noting that the bill was intended to combat wage theft by employers and to hold individual business owners accountable for their debts to workers.

The court then went on to address whether Section 558.1 provides courts with discretion as to whether to impose individual liability, noting that the statute says that a person acting on behalf of an employer "may be" held liable.

The court concluded that the legislature's use of the term "may" did not grant judicial discretion in imposing liability. Rather, the court said, the term reflected a recognition by the legislature that the party prosecuting the wage violation may not need to pursue such liability, if the employer has already paid the amounts due.

The trial court therefore erred in refusing to hold the executive personally liable for the wage violations under Section 558.1, the appeals court concluded.  

Seviour-Iloff v. LaPaille, Calif. Ct. App., No. A163503 (June 28, 2022).

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.