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California Supreme Court Rules Employee May Not Sue Payroll Service Provider for Unpaid Wages

BY: APA Staff | 03/01/19

The California Supreme Court has ruled that an employee may not bring a civil action against a payroll service provider (PSP), in addition to the employer, for unpaid wages due under the California Labor Code and applicable wage order [Goonewardene v. ADP, LLC, No. S238941 (Calif. S.Ct., 2-7-19)].

Facts

Sharmalee Goonewardene claimed her employer failed to pay her the wages she was due under the California Labor Code and applicable wage order and wrongfully terminated her when she informed her employer. She filed a lawsuit against her employer and her employer’s PSP–ADP, LLC. The employee claimed that the PSP was directly responsible for managing her employer’s payroll and providing accurate pay statements, and by not paying her fairly, the PSP was in breach of contract and negligent.

Court Decision

The employee’s lawsuit against the PSP for breach of contract was based on California’s “third party beneficiary doctrine.” The California Supreme Court concluded that the employer did not transfer its obligations regarding wages to the PSP. While employees may receive a benefit from a payroll service contract, the contract is not for their benefit, but for the benefit of the employer. If the PSP acted wrongfully, the employer could pursue breach of contract.

The court also found that the employee could not claim the PSP was negligent. The employee argued that by failing to properly calculate wages in accordance with labor laws, the PSP should have known that the employee would be injured. The court disagreed finding that labor laws provide employees with a full remedy against the employer, not the PSP.

APA Support

In a friend-of-the-court letter and later brief, filed jointly with the National Payroll Reporting Consortium, APA said that full remedies under federal and state labor laws already exist for proper payment of wages through employers. Employers can transfer tasks, but not the duty to ensure fair wages.

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