Bryan Schwartz Law California Appellate Court Victory: Individual Owners May Be Liable for Unpaid Wages

Corporate owners, officers, and directors – better make sure your company is following California’s wage laws, or you could be liable…personally. California workers and those who advocate on their behalf just gained a critical tool in the ongoing fight against wage theft across the state.

Bryan Schwartz Law has been litigating for more than seven years on behalf of low-wage workers at two now-shuttered Southern California restaurants, who brought a class action lawsuit alleging widespread wage theft against the closely-held corporation that owned the restaurants. After that corporation declared bankruptcy and closed the restaurants, the litigation principally focused on whether the plaintiff workers could recover their unpaid wages from that corporation’s sole owner, officer, and director as their joint employer, or alternatively, whether they could recover from that owner or his other business entity as the restaurant corporation’s alter egos. As a result of the Court’s published opinion in Turman v. Superior Court, the class of workers can now proceed to prosecute their wage claims against the owner and his other business, rather than the pyrrhic victory of a worthless judgment against an insolvent entity.

The Court ordered publication of two sections of the opinion, which address individual owners’ liability for unpaid wages under alter ego and joint employer theories. As to alter ego, the Court ruled that under the standard set by Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, an employee need not prove that the alleged alter-ego corporation was formed for the purpose of committing fraud or other misdeeds, as the trial court had erroneously determined. This section thus provides critical guidance to courts considering whether an entity formed for a lawful purpose may nonetheless be held liable as an alter ego if the corporate form is later used for an unlawful purpose.

As to joint employer, the Court interpreted the Supreme Court’s decision in Martinez v. Combs (2010) 49 Cal.4th 35, which held that, in actions for unpaid wages under the California Labor Code, courts must look to the three-part definition of “employer” within the Industrial Welfare Commission Wage Orders. Like a corporation, an individual can be liable if: he or she controls the wages, hours, and working conditions of the employees denied proper wages; suffers or permits workers to labor without proper pay; or meets the common-law test for an employer. The trial court had mistakenly ruled that Martinez was applicable only to efforts to hold other corporate entities liable, as opposed to individual owners, officers, or directors.

The Court of Appeal explained that “[The Owner’s] status as a sole shareholder and president of Koji’s cannot insulate him, or any other sole owner of a closely held corporation, from liability as a joint employer if his actions meet any one of the three definitions set forth in Martinez.” Turman thus makes clear that Martinez’s broad definition of employer applies uniformly in actions for unpaid wages.

Importantly, the Court also held that the tip pooling statute (Labor Code § 351), the Unfair Competition Law (Business & Professions Code § 17200 et seq.), and the Labor Code Private Attorneys General Act each have different standards for liability, separate from the Wage Order and common law definitions, which no published opinion had previously addressed. The opinion thus offers clear guidance to trial courts that they must consider each of these different standards, if applicable, and that they cannot simply ignore them.

Turman may have a broad impact, because so many workers obtain a judgment for unpaid wages against a defunct entity and are unable to collect. A 2013 empirical study by the UCLA Labor Center and the National Employment Law Project examined data from California Labor Commissioner wage claim cases and determined that in 60% of cases, the employing business was found to be non-active (having a status of cancelled, forfeited, dissolved, or suspended). The study also found that 83% of workers who prevailed before the Labor Commissioner never recovered a penny of the judgment awarded.

For their support in obtaining this long-anticipated victory,  Bryan Schwartz Law thanks co-counsel Altshuler Berzon, as well as amici curiae the California Employment Lawyers Association, Legal Aid at Work, Asian Americans Advancing Justice—Asian Law Caucus, Centro Legal de la Raza, Los Angeles Alliance for a New Economy, National Employment Law Project, Wage Justice Center, the Women’s Employment Rights Clinic of Golden Gate University School of Law, and the UCLA Labor Center.