by Michelle R. Ferber and Jennifer R. Lucas

On February 7, 2019, the California Supreme Court decided the case of Goonewardene v. ADP, LLC, which considered the novel question of whether an employee could sue her employer’s payroll company for wage and hour and other statutory violations.  Ultimately, the Supreme Court’s answer was that the payroll company was not liable to its client’s employee.

The plaintiff, Sharmalee Goonewardene, sued her former employer (Altour) AND Altour’s payroll company (ADP) for damages resulting from alleged wrongful termination, breach of contract, and various violations of the Labor Code.  The Trial Court refused to allow the plaintiff to proceed against ADP for claims related to her under-payment as an Altour employee.  The Court of Appeal reversed, holding that Goonewardene could proceed against ADP on three legal theories: breach of contract (as a third-party beneficiary to the unwritten agreement between Altour and ADP), negligence and negligent misrepresentation.  The California Supreme Court recently reversed that decision, holding that under these circumstances, ADP could not be liable to Goonewardene.

First, the Supreme Court decided that Goonewardene was not a “third party beneficiary” to ADP’s contract with Altour.  The Court determined that: (1) the “motivating purpose” of the payroll services contract was to provide a benefit to Altour (and any benefit to the employee was incidental), and (2) permitting an Altour employee to sue ADP would be inconsistent with the objectives of the contract.  The Court stressed that “there is no need to permit a third-party employee to bring suit to enforce an alleged breach by ADP of its obligations under the contract, because Altour is available and is fully capable of pursuing a breach of contract action against ADP…”  In other words, Goonewardene’s rights could be fully remedied in her lawsuit against Altour. Altour had the right to bring an action against ADP for violations, if any existed.

Next, the Supreme Court held that, for similar reasons, ADP owed no independent duty to Goonewardene that would support claims of negligence or negligent misrepresentation.  The court cited various reasons for this, including the lack of a special relationship between the employee and ADP that would justify this liability, and the potential conflicts of interest that would arise between an employer and its payroll company if the payroll company was independently liable for wage and hour violations.  But the main reason given by the court for refusing to allow an employee to sue the payroll company for negligence was that there was no need – the direct employer was clearly liable to the employee for 100% of these damages, regardless of whether they were caused by the employer or the payroll company.  The Court said that:

Given the employer’s clear and direct liability for any wage loss caused by the payroll company’s negligence in calculating the wages that are due, the imposition of a separate tort duty of care on a payroll company is generally unnecessary to protect the employee’s interests.

Throughout the opinion, the Court repeatedly emphasized that the employer is liable for wage claims, no matter what the circumstances.  Accordingly, the two main take-aways from this case for employers are as follows:

  1. You will be liable for mistakes and underpayments to your employees, regardless of whether the mistake originated with the payroll company or anyone else.  You need to independently confirm that your employees are being paid correctly, and not simply rely upon assurances of your payroll company.
  2. If your payroll company makes mistakes or in any way fails to correctly pay your employees, you may assert claims against that company directly.  Make sure that you have a solid contract with your payroll company providing for indemnity for damages caused by the payroll company’s negligence or willful misconduct.

Ferber Law has the expertise and knowledge to assist you with any questions you may have about employee payroll or your contracts with your payroll company, and welcomes your inquiries.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.