High court says payroll companies can’t be held liable for wage violations

The state Supreme Court shot down the legal theory that payroll companies carry liability under contract law for wage violations committed by companies that use their services in a unanimous opinion Thursday.

In Goonewardene v. ADP LLC, a worker for a travel company sued her employer, Altour International Inc., for various alleged labor law violations including unpaid wages. She also named ADP, which provided payroll services to Altour, in the lawsuit. A 2nd District Court of Appeal panel upheld three causes of action against ADP: breach of contract under the third-party beneficiary doctrine, negligence, and negligent misrepresentation.

According to court documents, ADP helped Altour maintain earnings records, working hours records, wage calculations and pay stub preparation.

The Supreme Court roundly rejected all three theories in a policy-focused decision. Two foci were that employees have enough avenues for relief already and that only Altour and ADP are parties to the contract.

Chief Justice Tani G. Cantil-Sakauye, who authored the opinion, wrote that a third party cannot just benefit from a contract to pursue third-party claims. The benefit to the third party must be an objective of the contract.

"In short, the relevant motivating purpose of the contract is simply to assist the employer in the performance of its required tasks, not to provide a benefit to its employees with regard to the amount of wages they receive," she wrote.

She added that even if benefitting the employee provided some motivation to the contract, allowing workers to sue payroll companies would contradict the contract's purpose by imposing heavy litigation costs on employers. That disqualifies the third-party doctrine as well. Goonewardene v. ADP LLC, 2019 DJDAR 1148 (Cal. Feb. 7, 2019).

The chief justice added that employees can seek full remedy from their employers; if the payroll company was derelict in its duties, the employer can hold it responsible in court.

"California law already provides the employee with a full and complete remedy for any wage loss the employee sustains as a result of the payroll company's negligent conduct," she wrote. "Under its contract with the employer, the payroll company is already obligated to act with due care in ensuring that the employer fulfills its obligations to its employees under the labor statutes and wage orders."

She also cited the weight of rising litigation in California for the court's disinclination to expand liability. "Imposition of a tort duty of care on a payroll company is likely to add an unnecessary and potentially burdensome complication to California's increasing volume of wage and hour litigation," she wrote.

Robert A. Lewis of Morgan, Lewis & Bockius LLP argued the case for ADP. He deferred comment to his client, which declined to give any.

Glen Broemer, who represented the plaintiff, said there are more theories under which payroll service providers might be held liable by employees, and that the case presents an interesting question as to whether liability could be expanded in the absence of duty.

"In this case, one employee stood alone against an entire industry. That industry is close to immunized for negligence and even gross negligence," Broemer said.

"The court seems to have been motivated as much by policy as by the contours of the law of third-party beneficiaries in limiting the liability of a payroll company to an employee," said Glenn Danas of Robins Kaplan LLP, who was not involved in the case.

"In short, this unanimous decision of the California Supreme Court is an extremely practical solution to the problem presented, and is fully consistent with the court's prior precedents," he said.

"ADP, under its contract with Altour, simply agreed to assist Altour by calculating the amount of wages that Altour owes to each employee in light of the applicable labor statutes and wage order and providing the ministerial services of making out paychecks and delivering the required pay information to each employee," Cantil-Sakauye wrote.