The California Supreme Court has cut off another avenue for employees to sue payroll provider companies for unpaid wages. California courts have previously found that employees cannot sue a payroll company under a theory that the company is the "employer." In a new decision, the California Supreme Court held that employees cannot sue payroll companies for unpaid wages under theories that the employee is a third-party beneficiary of the contract between the employer and the payroll company or that the payroll company acted negligently in not paying the employee the wages owed.
In reaching this conclusion, the court reasoned that employees are not third-party beneficiaries of contracts between the payroll company and the employer because the primary purpose of these agreements is to benefit the employer, not the employee: "Instead, the relevant motivating purpose is to provide a benefit to the employer, with regard to the cost and efficiency of the tasks performed and the avoidance of potential penalties."
As to the employee's negligence theory of liability, the court concluded the payroll company owed the employee no duty of care. The court noted that the employee can sue her employer, and that the "payroll company presumably will be liable to the employer if the payroll company's negligence in failing to comply with the applicable labor statutes or wage orders results in the employer being held liable in a suit brought by an employee against the employer."
The bottom line:
A California employee cannot recover unpaid wages from the payroll company utilized by the employer; the employee's recourse is against the actual employer.
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