Jones v. Gregory

• Citation: 137 Cal.App.4th 798,40 Cal.Rptr.3d 581
• Decision Date: 14 March 2006
• Docket Number: No. G030347.,G030347.
• Court: California Court of Appeals Court of Appeals
• Parties: Robert A. JONES, as Acting Labor Commissioner, etc., et al., Plaintiffs and Respondents, v. William S. GREGORY, Defendant and Appellant.

40 Cal.Rptr.3d 581

137 Cal.App.4th 798

Robert A. JONES, as Acting Labor Commissioner, etc., et al., Plaintiffs and Respondents, v. William S. GREGORY, Defendant and Appellant.

No. G030347.

Court of Appeal, Fourth District, Division 3.

March 14, 2006.

As Modified on Denial of Rehearing April 13, 2006.

Law Offices of Marla Merhab Robinson, John R. Marshall III and Cosmo A. Taormina, Santa Ana, for Defendant and Appellant.

Division of Labor Standards Enforcement, Miles E. Locker, San Francisco, and Johanna Y. Hsu for Plaintiffs and Respondents.

California Rural Legal Assistance and William G. Hoerger, San Francisco, as Amicus Curiae on behalf of Plaintiffs and Respondents.

OPINION

ARONSON, J.

William Gregory appeals from a judgment holding him individually liable for his corporation's "delinquencies in paying outstanding wages, expenses, interest and penalties, not because he `did business as' or through any `veil-piercing' analysis, but simply because he was a `corporate officer who ha[d] operational control of the corporation's covered enterprise,'" quoting Lopez v. Silverman (S.D.N.Y.1998) 14 F.Supp.2d 405, 412-413. The Labor Commissioner, by the Division of Labor Standards Enforcement (DLSE), brought this suit against Gregory on behalf of the corporation's unpaid California employees. Relying on assertedly analogous federal authorities, DLSE argued Gregory fell within the meaning of "employer" in various Labor Code¹ wage provisions and Industrial Welfare Commission (IWC) wage orders. Attacking the judgment, Gregory contends California law does not support imposing personal liability on corporate officers or agents as "employers." Guided by our Supreme Court's recent decision in Reynolds v. Bement (2005) 36 Cal.4th 1075, 32 Cal.Rptr.3d 483, 116 P.3d 1162 (Reynolds), we agree. We therefore reverse the judgment and remand for proceedings consistent with this opinion.

I FACTUAL AND PROCEDURAL BACKGROUND

Gregory was the creative force behind "Science Adventures," (SA) a large-scale collection of "hands-on" summer science camps aimed at elementary school children. The first-ever session of SA premiered in 1979, with 60 campers. Some 20 years later, there were more than 40,000 enrollees nationwide, generating in excess of $10 million in revenues.

Gregory's dominance of SA's corporate activities left no doubt about his place in the company's pecking order. Variously known to his employees as the "owner," "the big wig," "the top guy," and "the boss," Gregory was registered as SA's chief executive officer with the California Secretary of State. All remaining corporate positions for that entity were held by Gregory's wife, Toni.

Gregory held an ownership interest in a combined warehouse/office building housing SA's main base of operations and was a fixture at the facility. At any time of day, he might be found in virtually any area of the building.

In the wake of the company's dramatic growth, Gregory personally hired and assembled a team of seven lead staff members, each assigned to cover a different area of the company. All of these individuals reported directly to Gregory. Gregory set salaries and promotions for the members of this topmost echelon, and supervised their duties as well. He also set the wage rates for all other SA employees, authorized pay changes, and personally fired staff members he deemed unacceptable. Similarly, any ideas for new projects or expansion were directed to Gregory for his consideration and approval. And he was the only individual authorized to sign checks on SA's behalf. As one employee opined, Gregory "was the overall approver [sic] for everything.... Anything and everything went through Bill."

Being a seasonal enterprise, SA generated at least 50 percent of its revenue during the summer months. Put another way, SA's three-month summer program brought in "lots of cash flow on a regular basis." During the school year, however, the cash flow thinned out, so SA planned enrollment and staffing needs accordingly.

Near the end of summer 1999, SA ran into an unexpected glitch. Cash on hand ran low even though the program had produced some $10 million in gross receipts. By the time the dust settled, some 555 summer instructors and 147 administrators were left with wages due and unpaid. Gregory claimed to have no prior knowledge of the shortfall and identified the unauthorized release of some $300,000 in checks as at least a partial cause of the problem.

In a series of signed memos to all SA employees, Gregory recounted the company's funding status and its inability to pay wages. With each memo, the prospects turned progressively more bleak, with Gregory ultimately announcing a "priority" wage repayment scheme: "[W]e have begun paying those instructors who have returned to work first. They will be helping generate the cash which will eventually pay everyone else .... [¶] ... [¶] We now propose to pay any unpaid summer instructors who are not currently working, but who choose to return to teach summer camp 2000 in three payments. The first will be equal to approximately 25% of what is owed.... The second payment ... will be paid whenever the instructor shows up for training. The balance will be made at the end of the summer season..... [¶] ... [¶] Although all employees who have not been paid ... certainly have the right to seek legal action, they will be placed in last priority...." He invited any employee who would agree to settle their claim for 75 percent of the total sum owed to complete an attached release form.

According to Gregory, he relinquished control of SA to an investment group in November 1999. He continued to work for that group, Science Enrichment Services, until it filed for bankruptcy in October 2000. SA continues in operation as an ongoing concern and Gregory serves as its chief executive officer.

In August 2000, DLSE sued Gregory, SA (by then a suspended California corporation) and another entity, Community Achievement Services, Inc. (CAS), to recover wages owed to 45 former California employees. CAS filed for bankruptcy before trial.

DLSE's complaint sought an accounting and alleged the following causes of action: (1) failure to pay wages immediately upon discharge, layoff, or resignation (§§ 201-203); (2) failure to pay vested vacation time (§ 227.3); failure to indemnify business expenses (§ 2802); and (4) money had and received. The complaint also sought to enjoin the defendants pursuant to section 1194.5 "from engaging in any further and future violations of the labor laws, regulations and orders, specifically, (Labor Code sections 201, 202, 203, and 227.3.)" DLSE alleged "[e]ach of the Defendants was a joint employer of the employees, and an agent and/or alter ego of the other defendants...."

The matter went to trial in a bifurcated proceeding, with the court eventually entering judgment in favor of 14 employees who testified at trial. The judgment, entered jointly and severally against SA and Gregory, totaled $100,248.64 for unpaid wages, unpaid vacation time, business expenses, interest, and waiting time penalties. This appeal followed.

II DISCUSSION

A. Reynolds Rejected Plaintiffs' Argument that an Employer with Operational Control of a Corporation Is Liable for Employee Wages

Gregory argues the trial court erred in looking to Lopez's "operational control" standard to impose personal liability on a corporate officer for unpaid employee wages. The Fair Labor Standards Act (FLSA) defines "employer" broadly.² Holding a corporation's president liable for his employees' unpaid overtime wages, Lopez observed "[n]umerous [federal circuits] have concluded that an individual corporate officer or owner may be deemed an employer under the FLSA — and therefore responsible for the corporation's FLSA obligations — in situations where the individual has overall operational control of the corporation, possesses an ownership interest in it, controls significant functions of the business, or determines the employees' salaries and makes hiring decisions." (Lopez, supra, 14 F.Supp.2d at p. 412.)

Unlike the FLSA, the Labor Code supplies no uniform definition, broad or narrow, for "employer," although some provisions define the term in a manner expressly limited to the particular section. (See, e.g., §§ 233, subd. (b)(2) [sick leave requirement, providing that, "As used in this section," employer "means any person employing another under any appointment or contract of hire and includes the state, political subdivisions of the state, and municipalities"]; 350, subd. (a) ["As used in this article [concerning gratuities]," employer "means every person engaged in any business or enterprise in this state that has one or more persons in service under any appointment, contract of hire, or apprenticeship, express or implied, oral or written, irrespective of whether the person is the owner of the business or is operating on a concessionaire or other basis"].)

Under our Supreme Court's recent decision in Reynolds, federal law provides no mooring for the trial court's decision. In Reynolds, an automobile paint shop employee sought overtime wages for himself and putative class members, suing the incorporated paint shop, its president, and other individual defendants under section 1194. That statute provides, in pertinent part: "Notwithstanding any agreement to work for a lesser wage, any employee receiving less than the legal minimum wage or the legal overtime compensation applicable to the employee is entitled to recover in a civil action the unpaid balance of the full amount of this minimum wage or overtime compensation, including interest thereon, reasonable attorney fees, and costs of suit." (§ 1194, subd. (a); see also § 510 [defining overtime].)

Reynolds acknowledged "`[f]ederal decisions have frequently guided our interpretation of state labor provisions the language of which parallels that of federal statutes' [citation]." (Reynolds, supra, 36 Cal.4th at p....