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SEPTEMBER 2005
NO PERSONAL LIABILITY FOR CORPORATE OFFICERS FOR UNPAID OVERTIME
The much anticipated and long awaited decision in the Reynolds v. Bemet case has been issued
by the California Supreme Court which found that corporate officers and agents cannot be held personally
liable for unpaid overtime wages. The Court concluded that personal liability on corporate officers and
directors for unpaid wages owed by a corporate employer cannot be imposed and that such individuals
are protected from incurring personal liability, as "employers” for the economic harm the corporate
employer may have caused to its’ employees.
The Plaintiff claimed that he, along with others, were mis-classified as "exempt employees”
which deprived them of overtime compensation and that the mis-classification was implemented in order
to maximize the company’s profits and income. Plaintiff sued both the corporation and its directors and
officers for the failure to pay plaintiff overtime wages. The Court concluded that unless the officers or
directors of a corporation "personally directed or participated in the tortious conduct,” they are not
"employers” within the meaning of the statute and, consequently, can not be personally liable for the
corporation’s failure to comply with statutory overtime requirements.
This issue came to light because while the Labor Code gives employees a right to recover unpaid
overtime wages, the Code failed to specify who is liable as the "employer.” The Industrial Welfare
Commission (IWC) (or Labor Commissioner) defined an "employer” as an individual or entity who
"exercises control over the wages, hours, or working conditions of any person.” Using this definition,
Plaintiff asserted that the corporate officers and directors were "employers” and therefore are liable for
the corporation’s failure to pay overtime compensation.
The Court disagreed stating that corporate directors, officers and agents acting within the course
and scope of their agency (meaning doing their jobs) are not personally liable for the corporate
employer’s failure to pay its employees’ wages. The Court stated that directors and officers of a
corporation "do not incur personal liability for torts of the corporation merely by reason of their official
position within the corporate structure.”
This decision is very good news for the owners, officers, directors and agents of employers who
are sued for wage and hour violations.
What should you do:
Conduct an audit of employee classifications to ensure that employees are properly
classified as "exempt” or "non exempt”.
Mis-classification of an employee as exempt, preventing them from protection from the
Labor Code and Industrial Welfare Commission’s Wage Orders, can result in substantial
liability for failure to pay overtime, missed meals and rest breaks.
Job Offers Can Lead to Liability if Withdrawn
The California Court of Appeals has recently held in two separate cases that employers can be
liable for lost future income to potential new employees who left secure jobs to accept new positions.
In one case, an applicant relying on a job offer quit his job. Then the job offer was withdrawn
and the applicant was unable to find comparable work matching his former income. The applicant sued
and the jury awarded a half-million dollar in damages, which included the future lost income as the
amount he would have earned had he continued working at his former job through retirement, reduced
by earnings received and expected from the employment he had been able to find.
In another case, the supervisor conducting interviews represented that an applicant would earn
substantially more as his employee than at the job the applicant currently held. The applicant accepted
the job offer, quit his former position and began work. However, after several months of complaining that
his earnings were lower than what was represented during the interview, he was fired. The employee was
unable to return to his former job or and was also unable to find other work at a comparable salary. The
employee sued and the jury awarded over a million dollars that included future lost income plus punitive
damages. The appellate court affirmed the decision finding that the damages awarded are recoverable
by an employee pursuing a claim of fraud against an employer who induces him to leave secure
employment by knowingly making false promises regarding the terms of his future employment.
What Should You Do?
Offer employment only after you have completed all steps in the hiring process.
Train all interviewing supervisors as to their authority to offer employment.
Inform applicants that employment offers can only be made in writing by an authorized
company representative.
Reduce all offers to writing.
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Personal Liability for Offices - Sept 2005 |
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This information is intended to provide guidance in the area of employment law and is provided as a service of the Firm. While every effort
has been made to ensure the accuracy of the information contained in this bulletin, it is not intended to serve as "legal advice". If additional
information or assistance is needed on any of the topics contained in this informational package or any other matter, please feel free to
contact Cynthia Elkins for further information. All rights reserved. ©2005.
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