Friday, February 8, 2019

Goonewardene v. ADP, LLC

Under the Labor Code, an employee who believes he or she has not been paid the wages due under the applicable labor statutes and wage orders may bring a civil action against his or her employer.  (See, e.g., Lab. Code, § 1194; Martinez v. Combs (2010) 49 Cal.4th 35, 49-51; see also Lab. Code, § 2699.)  This case presents the question whether, when an employer hires an independent payroll service provider (hereafter payroll company) to take over all the payroll tasks that would otherwise be performed by an internal payroll department, the employee may bring a civil action against not only his or her employer but against the payroll company as well.

The Court of Appeal, while agreeing with prior appellate court decisions that a payroll company cannot properly be considered an employer of the hiring business’s employee that may be liable under the applicable labor statutes for failure to pay wages that are due, held that the employee may nonetheless maintain causes of action for unpaid wages against the payroll company for (1) breach of the payroll company’s contract with the employer under the third party beneficiary doctrine, (2) negligence, and (3) negligent misrepresentation.  We granted review to determine the validity of the Court of Appeal’s conclusions with respect to these three causes of action.

For the reasons discussed hereafter, we disagree with the Court of Appeal’s conclusion as to each of the proposed causes of action.

First, we conclude that the Court of Appeal erred in holding that an employee may maintain a breach of contract action against the payroll company under the third party beneficiary doctrine.  As explained, under California’s third party beneficiary doctrine, a third party — that is, an individual or entity that is not a party to a contract — may bring a breach of contract action against a party to a contract only if the third party establishes not only (1) that it is likely to benefit from the contract, but also (2) that a motivating purpose of the contracting parties is to provide a benefit to the third party, and further (3) that permitting the third party to bring its own breach of contract action against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.

Here, we conclude that whether or not a contract between an employer and a payroll company will in fact generally benefit employees with regard to the wages they receive, providing a benefit to its employees with regard to the wages they receive is ordinarily not a motivating purpose of the contracting parties.  Instead, the relevant motivating purpose of the contracting parties is to provide a benefit to the employer.  In addition, permitting each employee to name the payroll company as an additional defendant in any wage and hour lawsuit an employee may pursue would impose considerable litigation defense costs on the payroll company that inevitably would be passed on to the employer through an increased cost of the payroll company’s services, a result that would not be consistent with the objectives of the contract and the reasonable expectations of the employer or payroll company.  Accordingly, we conclude that an employee should not be viewed as a third party beneficiary who may maintain an action against the payroll company for an alleged breach of the contract between the employer and the payroll company with regard to the payment of wages.

Second, we conclude that the Court of Appeal also erred in determining that an employee who alleges that he or she has not been paid wages that are due may maintain tort causes of action for negligence and negligent misrepresentation against a payroll company.  As we explain, in light of a variety of policy considerations that are present in the wage and hour setting, we conclude that it is neither necessary nor appropriate to impose upon a payroll company a tort duty of care with regard to the obligations owed to an employee under the applicable labor statutes and wage orders and consequently that the negligence and negligent misrepresentation causes of action lack merit.

Accordingly, we conclude that the decision of the Court of Appeal should be reversed insofar as it held that plaintiff employee in this case may proceed against defendant payroll company on causes of action for breach of contract, negligence, and negligent misrepresentation.

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