Are You Personally on the Hook for Wage and Hour Violations?

Jeff Ranen’s inbox filled up fast when a new California law opened the door to holding company executives personally liable for wage and hour violations. “I got a lot of panicked e-mails from clients,” said Ranen, a partner in the Los Angeles office of Lewis Brisbois Bisgaard & Smith.

Relax, he responded. Although the change to the California Labor Code is not insignificant, it’s highly unlikely that supervisors, managers, directors—and, yes, HR professionals—will end up opening their wallets. “This statute’s bark is bigger than its actual bite in terms of individual liability,” said Ranen, national chair of the firm’s wage and hour class-action group.

Senate Bill 588, which became law Jan. 1 as part of the A Fair Day’s Pay Act, is an addition to the state’s Labor Code. It allows an employer or “any other person acting on behalf of an employer” to be sued by employees alleging wage and hour violations. Apprehension about the interpretation of that phrase has prompted anxious clients to contact Ranen and his colleagues. The lawyers say they haven’t yet seen litigation naming individuals in wage and hour suits under S.B. 588, but noted it can take several years for cases to work their way through the legal system.

Prudent moves for employers include adding supplemental insurance coverage and conducting periodic audits, management attorneys say.

Protection via Indemnification

The reassurance that these attorneys have been offering is based partly on another section of the Labor Code, one that protects managers, executives and other employees acting in the scope of their work. Section 2802 requires companies to indemnify employees in legal action, provide them with legal counsel and handle their defense. California law similarly shields managers and executives from personal liability in cases involving retaliation and discrimination, though they can be on the hook for sexual-, racial- and age-related harassment.

That’s not to say that managers and directors won’t be sued, however. Listing the name of an executive as a defendant to a wage and hour lawsuit throws a strong psychological punch that might help drive a settlement, said Mark Spring, an attorney in the Sacramento office of Carothers DiSante & Freudenberger.

So why was this language added to the Labor Code? Its intent, Ranen said, is to provide a vehicle to hold responsible the officers who set policies they know are illegal. The legislation also aims to make it easier for employees to collect judgments from successor businesses and satisfy those judgments through liens on property and assets.

Explore Insurance Coverage

Labor and employment attorneys advise HR professionals to meet with their business insurance brokers to review the scope of their coverage and explore whether supplemental coverage would be worthwhile—or even available.

Most California employment practices liability insurance (EPLI) policies exclude wage and hour claims, though some may provide coverage for legal costs, said Priya Cherian Huskins, an attorney in the San Francisco office of Woodruff-Sawyer & Co., an insurance brokerage.

Ranen suggests that small and midsize employers—up to about 750 workers—purchase EPLI because, despite its sizeable deductibles, it offers protection against the tremendous costs of litigation.

Directors’ and officers’ policies don’t necessarily include coverage for wage and hour claims, said Huskins, who specializes in business insurance. Very large companies may have specific policies that would pay the costs of wage and hour lawsuits, but these policies are typically very expensive.

Periodic Audits

Another smart move for HR professionals: Audit company wage and hour policies and practices. Ensuring compliance with California’s complex web of laws can prevent future litigation, said John Giovannone, a partner in Seyfarth Shaw’s Los Angeles office.

An audit doesn’t have to be a massive undertaking. Start by pulling a few wage and hour records and interviewing a manager about how he or she is calculating overtime and bonuses. If discrepancies arise, expand your review. “You can do a small sampling so it doesn’t take a lot of time or cost a lot of money,” Spring said.

Focus on high-risk areas in your field. Companies that rely on many independent contractors should make sure those workers are appropriately classified, while businesses that employ a large number of hourly workers should ensure compliance with rest breaks. “Just relying on the policies is not good enough,” he said. “You really need to see what’s going on in the weeds.”

Out of the hundreds of labor and employment cases that Spring has handled in 25 years of practice, just one resulted in an employee having to contribute to the settlement amount. “It’s very rare, and just being sued is something HR professionals shouldn’t get overly worried about,” he said, “but at the same time, it’s not something to ignore.”

June D. Bell is a San Francisco Bay Area reporter who covers California employment issues for SHRM.