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FMG Law Blog Line

California Court Rules That Payroll Companies Are Not Liable For Employer’s Wage And Hour Violations

Posted on: April 25th, 2019

By: Michael Shepherd

The California Supreme Court recently provided clarity to payroll companies in Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817. In Goonewardene, Plaintiff alleged claims of negligence and negligent misrepresentation against a payroll company based on wages due that the plaintiff claimed were not paid. The Court refused to impose a tort duty upon payroll companies, and emphasized five reasons for its decision:

First, the Court reasoned that California law already provides employees with a full and complete remedy for any wage loss an employee sustains as a result of the payroll company’s negligent conduct; an employee is entitled to recover in a civil action against the employer the full wages and other significant remedies authorized under the labor statutes.

Second, the Court reasoned that imposing tort liability on a payroll company is not necessary to deter negligent conduct because the payroll company is already obligated under its contract with an employer to comply with labor statutes and wage orders. Consequently, a payroll company would already be subject to liability for breach of its contract with the employer and tort liability would not appreciably increase the incentive for payroll companies to refrain from negligent behavior.

Third, payroll companies have no special relationship with an employer’s employees that would warrant the imposition of a duty of care.

Fourth, the Court reasoned that imposing a duty of care on payroll companies could distort the payroll company’s performance of its contractual obligations. The Court expressed the concern that where the meaning or scope of a labor statute or wage order is ambiguous or uncertain, a tort duty of care to an employee could adversely affect the payroll company’s fulfillment of its contractual obligations to the employer. The potential of greater tort liability may induce the payroll company to place the employee’s interest above those of the employer, to whom the payroll company has a contractual obligation.

Finally, the Court reasoned that imposing a tort duty of care on payroll companies would add an unnecessary and potentially burdensome complication to California’s increasing volume of wage and hour litigation. If a tort duty were imposed, then payroll companies would likely be joined as an additional party in every wage and hour lawsuit. The Court did not find such an increased burden was justified given that an employee can obtain a full recovery for his or her economic loss in a wage and hour action against an employer alone.

Thus, while the Court made clear that payroll companies can be liable to employers if they breach their contractual obligations, they cannot be sued by employees in tort for an employer’s obligations under California’s wage and hour laws.

For any questions, please contact Michael Shepherd at [email protected].

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