Employees Cannot Sue Their Employer’s Payroll Provider

The California Supreme Court Recently Held That Employees Cannot Sue Their Employer’s Payroll Provider for Wage and Hour Violations

Wage and hour lawsuits continue to be one of the most significant sources of liability in any California employer’s operations. According to recent studies, wage and hour lawsuits have increased more than fourfold since the earlier 2000’s (this far outpaces all other types of employment litigation). The most popular claims continue to involve allegations of exempt misclassification, independent contractor misclassification, off-the-clock work, improper or inaccurate calculation of the regular rate and overtime pay, minimum wage violations, and missed meal and rest breaks. The common theme among wage and hour claims is errors in payroll. Not surprisingly then, one question we commonly get asked by employers is: “Why aren’t these employees suing my payroll provider?” After all, many payroll providers advertise themselves as “extensions” of employers’ payroll departments and market themselves as having specialized knowledge about the calculation and payment of wages under applicable wage laws and regulations. So, why are payroll providers not facing the same potential liability for wage and hour violations?

On February 7, 2019, the California Supreme Court reaffirmed its position on this matter in Goonewardene v. ADP, LLC. According to the Court, an employee cannot sue their employer’s payroll provider for wage and hour violations because an employer’s payroll provider does not owe the employee a duty to ensure that the employee is paid correctly. The Court reasoned that the employer and payroll provider did not intend for the payroll provider to be contractually obligated to protect the employees from wage and hour violations. In addition, the Court found that it was sufficient that employees have the right to recover the full amount of the wages from their employers.

What This Means for Employers:

At first glance this decision might appear to be bad news for employers. However, there is a silver lining. First, this decision does not prohibit an employer from suing their payroll provider for issuing inaccurate payroll. If your payroll provider makes a mistake that ends up costing you, you may still be able to pursue a claim against them for their wrongdoing. Second, by keeping payroll providers (many of which are large, national companies) out of plaintiffs’ attorneys’ crosshairs, this decision actually helps to avoid increased wage and hour litigation targeting deep pockets. Third, and perhaps most importantly, this decision will prevent payroll service providers from raising their rates in order to build their coffers to defend against wage and hour lawsuits. This should be welcome news to employers.

This decision is also a good reminder for employers that they cannot “contract-away” their wage and hour liability to payroll providers. Employers must remember that they are not insulated from a wage and hour suit simply because they use a payroll service. Employers must also remember that simply because a payroll provider advertises their expertise in wage laws and regulations, this does not mean that they are reviewing the legality of your wage and hour practices. Consequently, even if you use a payroll service, you are still primarily responsible for ensuring that your employees are being paid correctly. If your company has any questions about wage and hour laws and regulations, or if you would like to audit your wage and hour practices, please contact Barsamian & Moody at (559) 248-2360.

The goal of this article is to provide employers with current labor and employment law information. The contents should neither be interpreted as, nor construed as legal advice or opinion. The reader should consult with Barsamian & Moody at (559) 248-2360 for individual responses to questions or concerns regarding any given situation.