July 21, 2022

D&O Liability: California Court Holds CEO Personally Liable for Unpaid Wages

Most corporate officers assume that they aren’t personally liable for obligations incurred by the companies they serve.  That’s usually the case, but a recent California case points out that there are some exceptions to that general rule.  Last month, the California Court of Appeal held that a CEO/CFO could be personally liable for the company’s failure to pay wages.  This excerpt from an Arnold & Porter memo on the case explains the Court’s reasoning:

In reaching this conclusion, the court analyzed California Labor Code section 558.1, which provides that “any employer or other person acting on behalf of an employer who violates, or causes to be violated” certain provisions of the Labor Code “may be held liable as the employer for such violation.” Section 558.1 defines a “person acting on behalf of an employer” as “a natural person who is an owner, director, officer, or managing agent of the employer.” The term “managing agent” includes corporate employees who exercise substantial independent authority and judgment in their corporate decision making and whose decisions ultimately determine corporate policies.

The memo says that the Court didn’t reach the issue of whether the CEO actually “caused” the violation, but notes that other courts interpreting the statute have held that the individual must either (1) have been personally involved in the alleged violation, or (2) had sufficient participation in the activities of the employer such that they may be deemed to have contributed to the violation.

John Jenkins