ADP Isn’t Liable for Employer’s Alleged Wage Violations

California Supreme Court said claims against the payroll service provider should be dismissed

Lisa Nagele-Piazza, J.D., SHRM-SCP By Lisa Nagele-Piazza, J.D., SHRM-SCP February 11, 2019
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The California Supreme Court recently ruled that ADP—and other third-party payroll service providers—can't be held liable for claims of wage and hour violations against the employers that use their services.

A woman sued her former employer for a variety of employment-related claims and later added ADP to the complaint, asserting claims for failure to pay wages and overtime premiums in a timely manner and provide accurate wage statements.

The California Court of Appeal found that a payroll service provider can't be held liable under the state labor code for improper wage payments, but it allowed the employee in the case to sue ADP for breach of contract and negligence. The California Supreme Court, however, reversed the appellate court's ruling on the breach of contract and negligence claims.

"There is a lot to digest in this thorough opinion, but this seems to be a complete win for the payroll companies," said Bill Nolan, an attorney with Barnes & Thornburg in Columbus, Ohio.

"The California Supreme Court put a stop to the rampant expansion of claims made by plaintiffs under the California Labor Code and related statutes," said Grant Alexander, an attorney with Alston & Bird in Los Angeles. The court made it clear that while employers are expected to comply with the labor code's wage and hour requirements, a third party that is indirectly involved in issuing paychecks can't also be held liable.

Employees already have a full opportunity to recover damages for alleged wage and hour violations from their employers, so expanding the pool of liability to include third-party service providers is unnecessary, Alexander noted.   

Breach of Contract

The employer in this case entered into a contract with ADP to provide payroll services. Although the employee was not a party to the contract, a third-party beneficiary can sue for breach of contract in certain situations.

[SHRM members-only resource: California Labor and Employment Law Overview]

Under the California Civil Code, "a contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it."

The appellate court found that the employee in this case was a beneficiary of the contract and therefore could sue ADP for breach of contract related to proper wage payments and accurate earnings statements.

But the state high court disagreed. Even though a contract between an employer and a payroll company will generally benefit employees with regard to the wages they receive, the purpose of the contract isn't to benefit the employees, the court said. Rather, the motivating purpose of the contract is to benefit the employer by having the service provider administer payroll.

"[P]ermitting each employee to name the payroll company as an additional defendant in any wage and hour lawsuit an employee may pursue would impose considerable litigation defense costs on the payroll company that inevitably would be passed on to the employer through an increased cost of the payroll company's services," wrote Chief Justice Tani Cantil-Sakauye for the court.

Negligence Claims

The California Supreme Court also said that holding a third-party payroll service provider, such as ADP, liable for negligence because of the employer's alleged wage and hour violations is against public policy. 

"The court noted that employees are already fully protected by the rights they have against their employers under the wage and hour laws, which is a very practical point that it seems hard to dispute," Nolan said.

The court also seemed to recognize that wage and hour litigation in California is already very challenging for employers, he noted. The court said that holding payroll companies liable for such claims would likely "add an unnecessary and potentially burdensome complication to California's increasing volume of wage and hour litigation."

The case is Goonewardene v. ADP LLC, Cal., No. S238941 (Feb. 7, 2019).

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