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The California Supreme Court has recently decided that a payroll company cannot be held liable to an employee for breach of contract and negligence in calculating wages.
The existing law is that a payroll company cannot be considered an employer for purposes of liability for California wage claims as well as Federal Fair Labor Standards Act claims. Futrell v. Payday California, Inc. (2010) 190 Cal.App.4th 1419. Goonewardene expanded this protection to exclude liability for breach of contract and negligence claims brought directly by employees against payroll companies.
The employer (Altour) and the payroll company (ADP) entered into an unwritten contract whereby ADP performed payroll tasks. The allegations were that ADP miscalculated plaintiff’s wages, that earning statements never contained a breakdown of regular hours, overtime hours or double overtime hours, and that earning statements did not reflect meal and rest break data. The allegations stated plaintiff received no double-time compensation though her time cards reflected otherwise, that she was paid twice a month on a basis that was intentionally confusing and did not comply with the wage orders of the Industrial Welfare Commission (IWC). Plaintiff alleged her employer and ADP both knew she was not being paid in accordance with California law. She noticed disparities between her own bookkeeping and her hours worked in paychecks. In January 2012, she was terminated.  According to her sixth amended complaint, she was terminated in retaliation for her efforts to be paid fairly and to receive those benefits to which she was legally entitled.
Plaintiff argued a third-party beneficiary theory that the contract between her employer and the payroll company was made for Plaintiff’s benefit, and therefore, as a third-party beneficiary, the payroll company could be liable to her directly for negligence and breach of contract. Though the Court of Appeals agreed, the California Supreme Court disagreed. The California Supreme Court looked at the purpose the of contract and found that the motivating purpose of the contracting parties was not for the employee’s benefit but for employer’s benefit.
What does this mean for employers?
Employers, and not payroll companies, remain on the hook and directly liable to employees for wage claims, untimely payments, incorrect payments, and incorrect pay stubs. Payroll companies such as ADP will likely continue to enter into verbal or “unwritten” agreements as here, as they provide insulation for them. If they enter into written agreements, they will likely continue to omit any language that implicates any liability for incorrect wages, incorrect earnings statements, and even failure to pay altogether. The written contracts will likely continue to emphasize the payroll company’s ministerial tasks of making out paychecks and delivering them, and the contracts will likely clearly note that funds will be provided by the employer.
If you are an employer, beware of waiving away responsibility for wage errors, especially when contracting with management companies specifically created and designed to minimize your risk.
For more information, please contact Bicvan Brown at