Owners of Corporation Are Not "Employers" Liable for Unpaid Wages
The California First District Court of Appeal has decided that individual owners of defunct corporations were not the employers of, and did not owe restitution for unpaid wages to, the employees of the defunct corporations. The decision, Bradstreet v. Wong (April 16, 2008) affirmed a trial court’s decision that the individual owners of the garment manufacturers known as the Wins corporations were not liable for wages the corporations owed to their employees. The Wins corporations employed garment workers for more than a decade. They experienced financial difficulty and closed without sufficient funds to pay all wages owed to their employees. In this case, the California Labor Commissioner, on behalf of the employees, attempted to recover the wages from the individual owners of the Wins corporations. The Labor Commissioner lost at the trial court level and appealed, along with an intervening party. The appeal asserted several arguments that the individual owners should be held liable for the unpaid wages, but the appellate decision rejected those arguments.
First, the decision explained that a limited, common law definition of “employer” (instead of a broader Industrial Welfare Commission definition found in its Wage Order for the garment industry) applies to actions brought pursuant to California Labor Code section 1193.6, which is the law authorizing the Labor Commissioner to file lawsuits against employers to recover unpaid wages on behalf of employees. Under the common law definition of employer, owners of corporate employers are not ordinarily considered employers in their individual capacity, and thus are not generally liable for wages owed by the corporate employer.
Second, the decision addressed California Labor Code section 2677, a statute that is specific to the garment manufacturing industry. This statute provides that parties other than the corporate employer can be held liable for unpaid wages as “deemed employers” in some circumstances, mostly relating to problems that arise from doing business with unregistered garment manufacturers. The appellate court held the plaintiffs did not establish the necessary facts to prove the individuals in this case should be deemed employers under this statute.
Third, the decision held that the individual owners were not liable for restitution of the employees’ unpaid wages under California’s Unfair Competition Law, Business and Professions Code section 17203. In this case, the individual owners did not require any employee to work for them personally and did not misappropriate to themselves any of the wages owed to the employees. If the plaintiffs had proven otherwise, the individual owners may have been liable for restitution.
This case is important for all individual owners of corporations that are employers. The decision respects the legal significance of incorporating a business and the protection that the corporate entity provides its owners and agents when corporate formalities are followed (this protection is know as the “corporate veil”). Still, if you are an individual owner of a corporation that may be unable to pay wages owed to its employees, you should consult with a qualified attorney to help insure that you do not become liable in your individual capacity.