Goonewardene v. ADP, LLC

• Decision Date: 07 February 2019
• Docket Number: S238941
• Citation: 6 Cal.5th 817,243 Cal.Rptr.3d 299,434 P.3d 124
• Parties: Sharmalee GOONEWARDENE, Plaintiff and Appellant, v. ADP, LLC, et al., Defendants and Respondents.
• Court: California Supreme Court

6 Cal.5th 817

434 P.3d 124

243 Cal.Rptr.3d 299

Sharmalee GOONEWARDENE, Plaintiff and Appellant,

v.ADP, LLC, et al., Defendants and Respondents.

S238941

Supreme Court of California.

February 7, 2019

Glen Broemer, Oxnard, for Plaintiff and Appellant.

Morgan Lewis & Bockius, Robert A. Lewis, Thomas M. Peterson and Zachary S. Hill, San Francisco, for Defendants and Respondents.

Kevin C. Young, San Diego, for Pay-Net, Payroll World, Inc., Erie Custom Computer Applications, Inc., Task HR-VA LLC, HCM Centric LLC, Adminasource, Inc., QTS Payroll Services, Inc., Promerio, Inc., and Payality, Inc., as Amici Curiae on behalf of Defendants and Respondents.

Dowling Aaron Incorporated and Stephanie Hamilton Borchers, Fresno, for Payroll People, Inc., The Payroll Group and Independent Payroll Providers Association as Amici Curiae on behalf of Defendants and Respondents.

Greines, Martin, Stein & Richland, Alana H. Rotter and Marc J. Poster, Los Angeles, for National Payroll Reporting Consortium and American Payroll Association as Amici Curiae on behalf of Defendants and Respondents.

Foley & Lardner, Eileen R. Ridley, San Francisco, Yesenia Garcia Peres and Anthony James Dutra for Paychex, Inc., as Amicus Curiae on behalf of Defendants and Respondents.

CANTIL-SAKAUYE, C. J.

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, 109 Cal.Rptr.3d 514, 231 P.3d 259 ; 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.

I. FACTS AND PROCEEDINGS BELOW

A. Trial Court Proceedings

In April 2012, plaintiff Sharmalee Goonewardene (plaintiff) filed the initial complaint in the underlying proceeding against her former employer, Altour International, Inc. (Altour), alleging causes of action for wrongful termination, breach of contract, violations of the Labor Code and related causes of action. The complaint alleged that Altour failed to pay plaintiff the wages she was due under the Labor Code and applicable wage order and wrongfully terminated her when she brought this failure to Altour’s attention.

After the trial court sustained a number of demurrers with leave to amend, plaintiff filed a fourth amended complaint (4AC). In addition to the numerous claims against Altour, the 4AC included a new, single cause of action against ADP, LLC (ADP), a payroll company that provided payroll services to Altour,¹ alleging that ADP had engaged in unfair business practices under the Unfair Competition Law based on its alleged failure to provide plaintiff with adequate documentation and records regarding her compensation.

After ADP demurred to the 4AC, plaintiff notified the court that she wanted to assert additional claims against ADP, and the court deferred ruling on ADP’s demurrer to the 4AC to permit plaintiff to file a motion for leave to file a fifth amended complaint (5AC). Plaintiff thereafter filed such a motion, indicating that she intended to assert claims of wrongful termination, breach of contract, unfair business practices, false advertising, negligence, and negligent misrepresentation against Altour and ADP. The trial court then sustained ADP’s demurrer to the 4AC and its opposition to the motion for leave to file a 5AC with regard to any claim that was based on the premise that ADP could properly be considered a joint employer of plaintiff but permitted plaintiff to file a 5AC on the remaining claims.

Thereafter, plaintiff filed a 5AC, but notwithstanding the trial court’s prior ruling, the 5AC included claims based on ADP’s alleged status as a joint employer of plaintiff as well as additional claims based on other legal theories. In June 2015, the trial court sustained ADP’s demurrer to the 5AC without leave to amend with regard to all causes of action and directed ADP to prepare a final order reflecting its ruling.

While that order was pending, plaintiff submitted a motion for reconsideration and for permission to file a sixth amended complaint (6AC) that closely resembled the 5AC but included a few additional factual allegations. In August 2016, without explicitly ruling on the motion for reconsideration and permission to file the 6AC, the trial court entered a final order sustaining ADP’s demurrer to the 5AC on all causes of action without leave to amend. The trial court subsequently entered a judgment dismissing plaintiff’s action against ADP.

B. Court of Appeal Decision

On appeal of the dismissal of the action against ADP, the Court of Appeal confined its review to the question whether the trial court had erred in sustaining ADP’s demurrer to the 5AC without leave to amend, effectively denying plaintiff the opportunity to have the allegations contained in the proposed 6AC considered to determine whether those allegations are sufficient to state causes of action. ( Goonewardene v. ADP, LLC (2016) 5 Cal.App.5th 154, 163-164, 209 Cal.Rptr.3d 722 ( Goonewardene ).) Inasmuch as plaintiff’s appellate briefs did not address the validity of the claims raised in the 5AC, the Court of Appeal focused its attention solely on the facts alleged in the 6AC to determine whether they supported any of the causes of action asserted in the 6AC. ( Id. at p. 163, 209 Cal.Rptr.3d 722.)

Because it is important to an understanding of the scope of the Court of Appeal’s holding, we quote in full the Court of Appeal’s recitation of the facts alleged in the 6AC on which its decision was based:²

"ADP is a payroll services provider. Since 2000, ADP’s advertising and corporate statements have stated that it provides payroll-related services to employers and employees. ADP offers to ‘serve as an extension of [an employer’s] payroll department and [to] take over all [the employer’s] payroll tasks.’ ADP holds itself out as possessing specialized knowledge...