California Supreme Court's Recent Decisions in Reynolds v. Bement & Yanowitz v. L'Oreal USA, Inc.

A recent California Supreme Court decision found that corporate officers and directors are not individually liable for employee wages, such as overtime pay, under California’s Labor Code. While the case, Reynolds v. Christian Bement, creates a little breathing room for executives in a time when laws such as Sarbanes-Oxley (the law that requires certification of financials and has increased scrutiny of corporate governance) have increased officer and director liability, it leaves the door open for executives to be liable for civil fines and penalties under California’s 2004 Private Attorney General Act.

The Reynolds’ case involved a company, Earl Scheib, that owned and operated approximately 50 automobile painting shops in California. Earl Scheib employees, including shop managers, sued the individual executives, who were also Earl Scheib Shareholders, claiming the officers and directors had a policy of requiring employees to work long hours with no overtime pay and misclassifying the shop managers as employees exempt from overtime wages in order to avoid paying overtime.

California has a strong public policy favoring enforcement of its wage laws, including overtime pay. The Industrial Welfare Commission (“IWC”) has the power to issue regulations regarding those laws and also the power to set the minimum wage and provide safeguards to ensure employees are paid those minimum wages.

The IWC has issued regulations which define “employer” broadly as any individual “who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or work or any person.” Cal. Code Regs., tit. 8, § 11090, sub. (2)(f). The Supreme Court in Reynolds was asked whether the IWC’s broad definition of “employer” applies in a state court action. It found that since the state legislature had not adopted this definition, it does not apply.

The court's ruling was in keeping with traditional notions that corporate agents are not individually liable for breach of contract or inducing a breach of contract. The employment relationship is based on the contract of wages paid for services rendered. However, there are exceptions to this rule. The Court noted that individual officers and directors could still be liable for wages jointly with the employer under federal law as well as in certain circumstances under state law. Examples of situations where liability may be imposed under state law include:

• Where the corporation is really a sham and being solely operated for the benefit of a few individuals who fail to follow corporate formalities.

• Although not addressed by the court, exposure may exist when a corporation enters the zone of insolvency. That is, when a company’s poor financial status requires its officers and directors to serve not only the interests of shareholders but also creditors.

In addition, the Court, in a concurring opinion, noted that the 2004 Private Attorney General Law, which allows individuals to enforce the Labor Code and collect civil fines and penalties previously only collected by the Labor Commissioner, provides that such fines and penalties may be awarded against “any employer or other person acting on behalf of an employer.”

The Reynolds decision is a reminder to executives and employers alike that the violation of California’s wage laws is costly and should be avoided.

How Can Dorsey Help?

Please contact Karen Wentzel, Gabrielle Wirth or Mandana Massoumi for more information.

Yanowitz v. L'Oreal, Inc. USA: Retaliation is Prohibited

Employers are prohibited from retaliating against an employee who makes a good faith complaint of discrimination. While most employers know that "whistleblowers" are protected from retaliation, identifying a whistleblower may not be easy. Under a recent California Supreme Court decision, Yanowitz v. L’OrealUSA,Inc., a formal or explicit complaint need not be made in order for a company to be exposed to a retaliation claim. Simply asking for “adequate justification” and refusing to carrying out a supervisor’s requested termination of an employee is sufficient to constitute a complaint for which retaliation is illegal. Accordingly, it may be difficult to recognize when a complaint has been made or a discriminatory act refused.

Under California’s Fair Employment and Housing Act (FEHA), it is illegal for an employer to “discharge, expel or otherwise discriminate against any person because the person has opposed any practices forbidden by [FEHA],” such as discrimination. Gov’t Code section 12940(h) (emphasis added). The purpose behind protecting whistleblowers is to encourage complaints to prevent discrimination and allow employers to take prompt corrective action. The principal questions before the Supreme Court were:

• Do a series of subtle acts by a company amount to retaliation?

The Supreme Court answered yes to both of these questions.

In the L’Oreal case, a regional sales manager, Ms. Yanowitz, was told by her general manager to fire a dark skinned female fragrance sales associate because she was “not good looking enough” and instead to “get [him] somebody hot." On a separate occasion he pointed to a young attractive blond and told Yanowitz to “get me some one that looks like that.” While it is conceivable that physical attractiveness could be a legitimate criterion for certain jobs (e.g. modeling for instance), the Supreme Court did not rule on this issue. It did note that the company did not have a policy that its sales associates had to be attractive nor had such a policy been applied to male sale associates. When Ms. Yanowitz inquired about the sales associate’s performance, she learned that she was one of the top performers. Yanowitz asked repeatedly for the general manager to provide “adequate justification” for termination and refused to carry out the termination. However, she did not complain to her immediate supervisor or Human Resources.

Following her refusal to terminate the sales associate and over the course of more than a year, her immediate supervisor solicited negative criticism from her subordinates, gave her negative performance reviews and criticized her publicly in front of her subordinates, refused to give her additional time to respond to such criticisms, implied in a meeting that she might be terminated and gave her directives that limited her authority with her staff. The company maintained that its actions were legitimate, in response to customer and employee dissatisfaction and that Ms. Yanowitz had been previously criticized for poor listening skills and her attitude. Ms. Yanowitz maintained that the company’s actions were unwarranted and retaliatory. Prior her refusal to terminate the sales associate, Ms. Yanowitz had had a long history of above average to outstanding job performance and had been an honored employee.

The Supreme Court did not discuss whether the company had a complaint procedure in place or what the consequences of Ms. Yanowitz’s failure to use it would be.

How Can Dorsey Help?

• Review your policies to ensure they include an effective and mandatory complaint procedure.
• Train your executives and managers to ensure they understand how to avoid decisions that are or may appear gender based.
• Make sure you are in compliance with California's new law requiring 2 hours of interactive training for supervisors and managers. Dorsey offers comprehensive on-site training packages to assist you in meeting this obligation.

Please contact Karen Wentzel, Gabrielle Wirth or Mandana Massoumi for more information.