CFO Personally Liable for Employee’s Unpaid Wages

Takeaway: Under the California Labor Code, a person acting on behalf of an employer who violates any provision of the Labor Code concerning the payment of wages may be held personally liable for the violation.

A company’s chief financial officer who refused to pay an employee’s wages using the proceeds from the sale of a company asset that the employee had arranged was personally liable for the unpaid wages under the California Labor Code, a California appeals court ruled. The court affirmed a Labor Commissioner’s award of $41,000 against the CFO.

The employee’s former employer was in the business of designing, manufacturing and selling cars. The CFO was involved in the day-to-day financial operations of the company. Among other things, he was responsible for processing payroll, paying invoices and reimbursing business expenses.

The company hired the employee to lead an engineering team. While in that position, the employee arranged the purchase of a research vehicle for his team to use to develop an extended-range electric vehicle. The company bought the research vehicle for $70,000. As a condition of the sale, the seller had the right to repurchase the car if it was put up for sale in the future. After the sale, the car was registered to the company.

The company ran into financial troubles in early 2019 and stopped paying their employees. The company’s CEO told the employee that the company was seeking new investors, and he assured him a new source of funding was imminent. In the meantime, the employer decided to use company cars to help cover payroll expenses. Employees with company cars were given the option to keep or sell their cars, with the value being credited against any unpaid wages.

Around this time, the employee came up with a plan to sell the research vehicle to help cover payroll for himself and his team. The employee asked the CFO for the title to the car so he could sell it. The CFO then gave him the title. The original seller agreed to repurchase the car on the condition that the funds be used to cover the company’s payroll expenses. The seller wrote a $70,000 check made out to the company and gave it to the employee.

The employee wanted the proceeds of the sale to go to this team, but the CFO responded that it was “not a good idea” because it would be unfair and illegal to distribute the funds only to the employee’s team. The employee never received the funds.

The employee filed a complaint with the labor commissioner against his former employer and its CFO. The labor commissioner held a hearing and awarded the employee $170,000. Of that amount, the labor commissioner determined that the CFO was personally liable for $41,000, consisting of $12,500 in unpaid wages, $26,500 in waiting time penalties and $2,000 in interest.

The CFO appealed the labor commissioner’s decision to the superior court. The court held a two-day trial and affirmed the labor commissioner’s decision. The CFO appealed.

Here, the California appeals court said, the trial court determined that the CFO was personally liable under California Labor Code section 558.1 because he unilaterally prevented the proceeds from the sale of the research car from being used to pay the employee’s wages.

The CFO claimed that the trial court erred because there was no evidence that one of his superiors instructed him to pay the employee’s wages using the funds from the sale. However, there was evidence that the company CEO told the CFO to pay the employee using the proceeds of the sale, so the court rejected this claim.

The CFO also contended that, even if he had been instructed to use the funds to pay the employee’s wages, he was not personally liable because he never received the check from the sale. The appeals court rejected this claim as well. While the employee conceded he did not give the CFO the check from the sale, the CFO did not dispute that the employee received the requisite approval to use the sale proceeds to pay his wages. Moreover, the employee would have given the check to the CFO if the CFO had agreed to use the funds for payroll. The CFO refused, so the employee declined to give up the check. Under these circumstances, the employee was justified in conditionally refusing to turn over the check, the court said.

The appeals court affirmed the lower court’s judgment.

Wang v. McKeirnan, Calif. Ct. App., No. B324442 (Jan. 29, 2024).

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