[USA] California - Supreme court ruling is welcome news for payroll companies

The California Supreme Court has ruled that a payroll company ADP is not directly liable for an employer’s alleged wage error, JD Supra reports.

The court decided that Sharmalee Goonewardene could not sue ADP - the payroll provider of her former employer - who she alleged had failed to provide accurate records of her wages. Initially, Ms Goonewardene’s lawsuit was against Altour International, Inc., her former employer. Later she attempted to include ADP as a defendant for breach of contract, negligence and negligent misrepresentation.

The Court explored whether Ms Goonewardene could sue ADP for breach of contract between ADP and her employer, on the basis that she was a third-party beneficiary of that contract.

Ms Goonewardene claimed her employer entered into an “unwritten contract” with ADP so the payroll company would carry out “all payroll services for Altour, including maintaining [Altour’s] employees’ earnings records, adding hours on their time cards, calculating their wages under applicable labor laws, and preparing the paycheck and paystubs for the employees.”

So, she alleged, she and the company’s other employees were intended beneficiaries of an “unwritten contract” between Altour and ADP. Ms. Goonewardene alleged that ADP breached its “unwritten contract” with Altour because it didn’t give her, and other Altour employees, paychecks and pay stubs that accurately showed their wages.

The Court found that she could establish none of the three elements needed for a third-party beneficiary claim:

  • That she would benefit from the contract
  • That a motivating purpose of Altour and ADP was to provide a benefit to Ms Goonewardene and Altour’s other employees
  • That permitting Ms Goonewardene to bring her own breach of contract action against ADP would have been consistent with the objectives of the contract and the reasonable expectations of ADP and Altour as the contracting parties

Because she could not meet these three requirements, Ms Goonewardene could not sue ADP for breach of contract under the third-party beneficiary doctrine. The Supreme Court also ruled that Ms Goonewardene could not sue ADP for negligence or negligent misrepresentation based on ADP allegedly providing inaccurate information about her pay.

The Court found no need to impose liability on ADP as the payroll services provider because California law already allows employees to sue the employer for wage violations.

It said imposing liability on the payroll company would not deter negligent conduct because “under its contract with the employer, the payroll company is already obligated to act with due care in ensuring that the employer fulfils its obligations to its employees under the labor statutes and wage orders.”

The Court found that a payroll company does not have a special relationship with the employer’s employees that would permit an employee to sue the payroll company. Rather, the payroll company’s obligations are to the employer, not the employee.

Allowing employees to sue payroll companies for negligence or negligent misrepresentation would be likely to add “an unnecessary and potentially burdensome complication to California’s increasing volume of wage and hour litigation.”

Employers should note that although The Goonewardene decision is welcome news for payroll companies, companies using these services must make sure service providers’ practices follow all applicable wage and hour laws. Employers must keep informed of developments in wage and hour law, and ensure their payroll service providers adjust their practices accordingly.