California Supreme Court protects independent payroll service provider from suit

Image: Shutterstock

Image: Shutterstock

The employer in this case hired an independent payroll service provider to take over all the payroll tasks that would otherwise be performed by an internal payroll department. A former employee sued the employer and the payroll company on multiple claims, including breach of contract, negligence, and negligent misrepresentation.  The payroll company, seeking its own protection but having lost at the court of appeals, appealed the decision to the California Supreme Court arguing that it should not be held liable on those claims.

Background

The employer terminated one of its employees who turned around and sued the employer for wrongful termination, breach of contract, violations of the California Labor Code, and related causes of action.  The former employee amended her lawsuit multiple times to add more claims against the employer. Eventually she also added the payroll company as a defendant in the suit and sued it on claims of breach of contract, unfair business practices, false advertising, negligence, and negligent misrepresentation.  The California Courts of Appeals, while recognizing that a payroll company cannot properly be considered an “employer” for the purposes of these claims, determined that the employee may maintain the breach of contract, negligence, and negligent misrepresentation claims for unpaid wages against the payroll company.  The payroll company appealed the decision arguing that it should not be liable for such claims.

Supreme Court’s Decision

On appeal, the California Supreme Court reversed the decision of the court of appeals.  The Supreme Court broke its decision down into two sections. First, the court determined that under California’s third-party beneficiary doctrine, the employee could not maintain a breach of contract claim against the payroll company.  Under this doctrine, an individual or entity that is not a party to a contract may bring a breach of contract action against a party to the contract only if the third party establishes that (1) it is likely to benefit from the contract, (2) a motivating purpose of the contracting parties is to provide a benefit to the third party, and (3) 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.  The court found that because providing a benefit to employees is ordinarily not among the motivating purposes of a contract between an employer and a payroll company, and because it would be inconsistent with the objectives of the contract and the reasonable expectations of the contracting parties to permit the employees to sue the payroll company for breach of contract, the breach of contract claim fails.

Second, the Supreme Court addressed whether the causes of action for negligence and/or negligent misrepresentation should be allowed.  The court noted that no jurisdiction permits an employee to maintain a tort cause of action for negligence or negligent misrepresentation against a payroll company hired by his employer.  The court then looked at multiple policy considerations and ultimately concluded 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, the Supreme Court ruled in the payroll company’s favor.

Takeaway

The important thing to note here is that although the payroll company was the one who was involved in the mistake, the payroll company got off the hook. While this was a suit by a former employee against the employer and the payroll services provider that involved contract and tort claims, the case presents a broader learning lesson.  Use of third-party payroll processing and service providers is a common practice in the trucking industry and other industries. Trucking companies often rely on such third-party providers to help make sure their payroll processing, wage calculations and statements, and related pay practices are compliant with applicable law. This process can be complicated where a company has employees in multiples states, including states with requirements and restrictions that are more exacting in some regards, such as California.  It is advisable to consult with experienced legal counsel to make sure that appropriate safeguards are in place when hiring a third-party payroll services company, and that contracts are drafted in a way to minimize the risk of an unfavorable outcome in a lawsuit, while maximizing the protection of a company’s business interests.

R. Eddie Wayland is a partner with the law firm of King & Ballow.  You may reach Mr. Wayland at (615) 726-5430 or at rew@kingballow.com.  The foregoing materials, discussion and comments have been abridged from laws, court decisions, and administrative rulings and should not be construed as legal advice on specific situations or subjects.