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Corporate Owner and Officer Liability for Wrongful Acts*

By: Olivia Goodkin and Risa J. Morris

Los Angeles, CA

* As published by Employment Law360.

We are often asked whether the owner, officer or director of a corporation is responsible for the acts of the corporate entity with respect to employment claims. Barring a claim that the owner is the alter ego of the corporation, usually the individuals who own and operate companies are not individually liable for employment-related claims. There are notable exceptions, however, in two major areas of law: wage and hour claims and sexual and other harassment claims.

Expansion of Individual Liability for Unpaid Wages

Recent court decisions suggest an expansion of individual liability for unpaid wages under both federal and state law. In Boucher v. Shaw, the Ninth Circuit Court of Appeals, the federal appellate court covering California, imposed liability for unpaid wages under federal law on managers of a bankrupt company under the federal Fair Labor Standards Act (FLSA). The FLSA applies to most businesses across the United States. Defendants included the CEO and another manager, each of whom had significant ownership interests in the company, and the CFO, who had no ownership interest. All three individual defendants were held liable for the unpaid wages sought under the FLSA.

The court opined that the definition of employer under the FLSA was very broad, encompassing corporate agents who have economic control or exercise control over the nature and structure of the employment relationship. The 2009 Boucher ruling expands previous law, which held that individuals might only be liable if they had a significant ownership interest in the company.

In May 2010, the California Supreme Court in Martinez v. Combs declined to apply the broad FLSA definition of employer to wage claims filed against individuals under California law. However, a series of other unpublished California appellate court opinions suggest that individual employees may still be held personally liable under a provision of the California Labor Code known as the Private Attorney General Act (PAGA). PAGA permits an aggrieved employee to enforce any provision of Californias Labor Code that provides for a civil penalty, including certain provisions relating to payment of wages. While these unpublished decisions regarding PAGA are not binding law on courts hearing such cases in the future, they create the possibility of significant new liability for managers under California law if courts continue the trend.

The risk of liability under both PAGA and Boucher increases incentive to companies, their key executives and shareholders to make sure overtime wages, accrued vacation and other compensation is paid, thereby avoiding potential liability for owners and officers in wage and hour lawsuits.

Individual Liability for Harassment

In California, an individual employee whether a manager or a co-worker can be held personally liable for harassment under the Fair Employment and Housing Act. This extends to any kind of prohibited harassment, whether sexual or on the basis of race, religion or other protected categories. On the other hand, individual employees cannot be held personally liable for discriminatory conduct in the workplace. California law provides that only the employer itself can be held liable for discrimination. Similarly, if an employee sues for retaliation for complaining about conduct in the workplace, even harassment, only the employer can be held liable. An individual manager also cannot be held liable for failing to prevent harassment of others.

For example, imagine a workplace in which Ellen Employee often taunts Alice Assistant because of her ethnic background. Alice complains to Carl Corporate, the employers CEO, who does nothing. Stan Supervisor, Alices manager, knows nothing about the taunting or the complaint, but fires Alice because he is uncomfortable working with someone of Alices ethnic background. Carl approves the termination because he was annoyed by Alices complaint. Alice files a lawsuit for harassment, retaliation and discrimination. Is Ellen, Carl or Stan at risk of being personally named in the lawsuit?

Ellen can be held personally liable for her harassment of Alice and may be subject to damages under California law for her conduct. In contrast, Carl and Stan probably cannot be named as individual defendants, even though Stans termination of Alice was discriminatory and Carls conduct was both retaliatory and a failure to prevent harassment. The employer alone will be liable for Carl and Stans conduct, although Carl and Stan, like Ellen, may be subject to immediate termination of their employment for their actions in violation of law and company policy.

The lesson to everyone is to be thoughtful about their conduct in the workplace. Aggrieved employees can and do file lawsuits naming co-workers and managers for perceived harassment. Although employers often will provide an attorney to defend employees named in harassment lawsuits, if a jury, judge or arbitrator ultimately finds that the individual employee did engage in harassment, the employer may not have any obligation to pay the judgment against the individual employee or to pay all of the employees attorneys fees.

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