California Supreme Court Affirms Trial, Appellate Court Rulings in Unpaid Overtime Claim; Former Manager Failed to State Cause of Action Against Individual Corporate Officers

Issues

In this class action for recovery of unpaid overtime compensation (Steven Reynolds v. Christin Bement et. al. (2005 Daily Journal D.A.R. 9680, Cal., Aug. 11, 2005), the question before the California Supreme Court is whether plaintiff has stated a cause of action against any of the eight individuals who were officers or directors and shareholders of the Delaware corporation – or its California subsidiary – which owns an automobile painting business for which plaintiff formerly worked. The Court of Appeal upheld the trial court’s sustaining of a demurrer by defendants, and the Supreme Court affirmed the appellate court judgment.

Facts

Plaintiff Steven Reynolds was employed by defendants Earl Scheib, Inc., and Earl Scheib of California, Inc., and by eight individual defendants, Bement et. al., as a shop manager and assistant shop manager at several locations of their auto painting business. Defendants own and operate some 50 auto painting shops in California. Reynolds alleged that the defendants required shop managers “to work long overtime hours without overtime compensation,” allegedly misclassfying them as exempt employees so defendants could deprive them of statutory overtime compensation in order to maximize profits.

Reynolds initially filed a complaint only against Scheib, seeking damages on behalf of himself and others who worked at the California shops from 1996 to the present. Scheib’s president, Bement, was subsequently added as a defendant, and Bement removed the case to federal court. The case was remanded to state court, and Reynolds named the seven remaining individual defendants. His first amended complaint alleged, among numerous other claims, that defendants failed to pay overtime compensation in violation of Labor Code sections 1194, 510 and “applicable wage orders,” as well as unlawful deduction of wages and other Labor Code violations. The trial court sustained the demurrers with leave to amend as to some causes of action and without leave to amend as to the others. Reynolds did not amend; judgment was entered for defendants, and the entire action was dismissed with prejudice. The Court of Appeal affirmed.

Supreme Court Decision

Noting that Reynolds “does not contend any statute expressly subjects corporate control figures to liability, as employers, for unpaid wages,” the Court said it does contend that the California Industrial Welfare Commission (IWC) has authority to specify appropriate section 1194 defendants because of its powers to fix a minimum wage and to provide safeguards to insure employees receive the wages due them (Cal. Drive-in Restaurant Assn. v. Clark (1943) 22 Cal2d 287, 302). Defendants disagreed that IWC “employer definition” applies in this case, insisting none of them can be held personally liable for compensation owed by the corporate employer.

To resolve that question, the Court looked “not to the IWC’s authority, nor to the asserted necessity of its employer definition,” but to the IWC’s intent. “The best indicator of that intent,” the Court said, “is the language of the provision itself.” (Williams v. Superior Court (1993) 5 Cal.4th 337, 350.) Furthermore, the Court ruled, the “plain language” of IWC Order No. 9, which defines “employer,” does not “expressly impose liability” on individual corporate agents under section 1194. A statute must be construed in light of common law, the Court said, “unless the Legislature ‘clearly and unequivocally’ indicates otherwise.” (California Assn. of Health Facilities v. Department of Health Services (1997) 16 Cal.4th 284, 297.)

The Court agreed with defendants that the Legislature, in amending sections 510 and 1194, had not clearly indicated its intent to depart from the common law: Neither section 510 nor section 1194 contains any reference to the IWC employer definition, the court noted, and section 510 details certain employer obligations but does not specifically define the term “employer.” In addition, section 1194 simply provides that “any employee” receiving less than the legal minimum wage of overtime compensation is “entitled to recover the same in a civil action.”

The Court also agreed with defendants that Reynolds “forfeited any further leave to amend” by failing to request leave in the trial court, or to argue in the Court of Appeal that the trial court erred in its denial as to specific causes of action. “Whether to grant leave to amend a complaint is a matter within the discretion of the trial court,” the Court ruled (Campbell v. Regents of the University of Cal. (2005) 35 Cal.4th, 311, 320.) The Court said it is “well-settled” that arguments about insufficiency of evidence “cannot be raised for the first time in a petition for rehearing.” (Gentis v. Safeguard Business Systems, Inc. (1998) 60 Cal.App.4th 1294, 1308.)