In Bradstreet v. Wong, (161 Cal.App.4th 1440, Cal.App. 1 Dist., April 16, 2008), a California Court of Appeal considered whether the shareholders, officers, and directors of several manufacturing corporations could be held personally liable for Labor Code violations after the corporations experienced financial difficulties and the corporations’ employees were either paid late, or not paid at all. The Court of Appeal held that the shareholders, officers, and directors could not be held personally liable because the corporations, not the shareholders, officers, and directors, were liable for the alleged violations of the Labor Code.
Toha Quan and Anna Wong owned the stock and served as corporate directors, officers, and managers for three closely-held corporations; Wins of California, Wins Fashion, and Win Industries of America (collectively, “Wins Corporations”). Wins Corporations engaged in garment manufacturing. Jenny Wong served on the board of directors and performed bookkeeping and payroll for Wins Corporations. In the summer of 2001, the Wins Corporations failed to meet payroll for several months and to also pay other expenses. The Wins Corporations told employees that they would eventually be paid. Employees began to complain to the Division of Labors Standard Enforcement (“DLSE”) and the United States Department of Labor (“DOL”).
The DOL filed a lawsuit in federal court against the Wins Corporations and Toha Quan, Ann Wong, and Jenny Wong (collectively, “Defendants”) in their personal capacity. The Wins Corporations declared bankruptcy. The California Labor Commissioner (“Commissioner”) later filed a state court lawsuit seeking to hold Defendants personally liable for the unpaid wages owed to the employees of the Wins Corporations. The trial court found in favor of Defendants and the Commissioner appealed.
The Court of Appeal affirmed the trial court’s decision. The Commissioner asserted that personal liability could be imposed on Defendants because a provision of the Industrial Welfare Commission (“IWC”) wage order that is applicable to the garment industry provides that an “employer” is defined as “any person as defined in Section 18 of the Labor Code, who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person.” The court held that this definition of employer did not apply here.
The trial court applied the common law definition of employer. In Reynolds v. Bement (2005) 36 Cal.4th 1075, the California Supreme Court stated, “Under the common law, corporate agents acting within the scope of their agency are not personally liable for the corporate employer’s failure to pay its employees’ wages . . . regardless of whether the corporation’s failure to pay such wages, in particular circumstances, breaches only its employment contract or also breaches a tort duty of care.” The Reynolds court held that where the terms “employee” and “employer” were not statutorily defined, “the applicable rule of statutory interpretation is that these terms should be construed in accordance with the common law, unless the Legislature clearly and unequivocally indicated otherwise.”
The Commissioner brought suit under Labor Code section 1193.6, which uses the term “employee” but fails to define the term. The Commissioner alleged violations of Labor Code sections 200, 201, 202, 204, and 227.3. These Labor Code sections impose obligations on the “employer,” but the term is not statutorily defined. The court noted that, like in Reynolds, it was left with the situation where neither the term “employee” nor “employer” was statutorily defined in the substantive Labor Code provisions which the Commissioner alleged were violated. Therefore, the terms must be interpreted in accordance with common law. The court noted that the reference to “orders of the commission” in section 1193.6 did not evince a legislative intent to deviate from the common law definition of “employee” or “employer.” Under the common law, corporations, not the individuals, are liable for the failure to pay employees’ wages. Therefore, the Wins Corporations, not Defendants, are liable for the failure to pay the employee’s wages.
The court also determined that Defendants were not “deemed” employers under Labor Code section 2677. Section 2677 makes “[a]ny person engaged in the business of garment manufacturing who contracts with any other person similarly engaged who had not registered” with the Labor Commissioner a “ deemed . . . employer” who is jointly liable for violation of certain wage and hour requirements. The purpose of section 2677 is “to end the practice in the garment industry of manufacturers evading responsibility for certain labor violations from which they benefit because they are not the employers of an independent contractor’s employees.”
Here, Defendants were the sole owners and managers of Tomi, Inc., which is a Utah garment manufacturing company. When the Wins Corporations were experiencing financial difficulties, the DLSE denied Wins of California’s applications for renewal and the corporation continued to operate without a registration. Tomi, Inc. continued to do business with Wins of California, even though it was an unregistered garment manufacturer. Commissioner argued that Defendants, through their ownership of Tomi, Inc., which continued to do business with an unregistered entity, and Defendants, as individuals may be deemed employers of Wins of California employees and held jointly liable for Wins of California failure to pay its employees’ wages.
Although the Court of Appeal agreed that the term “person” as used in section 2677 imposes liability on business entities or individuals, here it was Tomi, Inc., not Defendants who contracted with Wins of California. Nothing in section 2677 also deems “the owners, officers, or managers of the ‘person’ who ‘contract[ed] with’ the unregistered garment manufacturers to be employers.”
However, if a “corporate entity that contracts with an unregistered manufacturer is abused by individual owners or officers who disregard the separate status of the corporate entity and use its assets for their personal benefit, then the alter-ego doctrine may be applied to hold these individuals accountable.” Here, the Commissioner failed to prove that there were grounds to “pierce the corporate veil.” The Defendants did not make personal use of the Wins Corporations assets, they did not commingle corporate and personal assets, and the corporations were not inadequately capitalized.
The Defendants are also not required to personally pay the unpaid wages under the Unfair Competition Law (“UCL”). An employee alleged that Defendants “directly and actively participated” in the alleged Labor Code violations, and could be held individually liable under the UCL for the unfair practices committed by the Wins Corporations. The intervener sought restitution in the form of unpaid wages.
If the Defendants “directly and actively participated” in the unfair business practice, penalties could be imposed under Business and Profession Code section 17206. However, such penalties “are an available remedy only in a public action.” However, the remedy sought by the employee is not one for the payment of damages, but one of restitution from Defendants. The employee did not work for Defendants, she worked for the Wins Corporations. Defendants did not personally obtain the benefit of her services and the corporation had the duty to pay her wage. Restitution is only available if “a defendant has wrongfully acquired funds or property in which a plaintiff has an ownership or vested interest.” Here, the employee paid the labor to the Wins Corporations, not Defendants. The Wins Corporations, not Defendants, owed employee the wages. Therefore, the Defendants cannot be required to pay the employee the unpaid wages as restitution.