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California Supreme Court: Payroll Company Can't Be Roped Into Customer's Wage-and-Hour Suit

California State Supreme Court building in San Francisco. (Photo: Jason Doiy/ALM)

California's high court on Thursday struck a decisive blow for payroll companies, finding that employees could not bring claims for their employers' failure to pay wages under the state's employee-friendly labor laws.

The California Supreme Court's unanimous decision reverses a lower appellate court that had allowed Sharmalee Goonewardene to proceed with third-party breach-of-contract claims and claims of negligence and negligent misrepresentation against New Jersey-based ADP LLC, the outside company who handled payroll for Altour International Inc., the travel agency where she worked.

"Inasmuch as an employee can obtain a full recovery for his or her economic loss in a wage-and-hour action against the employer alone, the substantial burden to the judicial system that would result from the addition of a tort action against the payroll company is likely to outweigh any potential benefit," wrote Chief Justice Tani Cantil-Sakauye.

The chief justice wrote that allowing payroll companies to be brought into such cases would likely mean "an unnecessary and potentially burdensome complication to California’s increasing volume of wage and hour litigation."

The decision is a win for ADP and its lawyers at Morgan, Lewis & Bockius. Morgan Lewis partner Robert Lewis, who argued at the Supreme Court for ADP, referred a request for comment to his client. ADP representatives weren't immediately available.

Glen Broemer, the Jersey City, New Jersey-based lawyer who represents plaintiff Goonewardene, said in an email that he wasn't available for comment Thursday.

No Separate Tort

Grant Alexander, a commercial and employment litigator at Alston & Bird in Los Angeles who has been monitoring the case, called the ruling "good news for companies" in California.

"I think it closes a loophole that plaintiffs lawyers were trying to explore to try to bring in another deep pocket into wage-and-hour litigation," said Alexander, who isn't involved in the underlying case. "Had it gone the other way, I don’t know what companies like ADP would have done."

Thursday's decision reverses a 2016 ruling from the Second District Court of Appeal, which found that Goonewardene could pursue breach-of-contract claims against ADP under the theory that she was a third-party beneficiary of the contract between ADP and her employer for payroll services. But in Thursday's opinion, Cantil-Sakauye rejected the lower court's analysis of the third-party beneficiary doctrine.

"When an employer hires a payroll company, providing a benefit to employees with regard to the wages they receive is ordinarily not a motivating purpose of the transaction," the chief justice wrote. "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."

While the chief justice found that employees have "an important and fundamental interest" in receiving accurate and timely payment of wages, she found that a variety of policy considerations weighed against imposing a tort duty of care to employees on payroll companies.

“Given the employer’s clear and direct liability for any wage loss caused by the payroll company’s negligence in calculating the wages that are due, the imposition of a separate tort duty of care on a payroll company is generally unnecessary to adequately protect the employee’s interests,” she wrote.

ADP drew amicus backing from a number of payroll industry groups and competitors, including the National Payroll Reporting Consortium and American Payroll Association, represented by counsel at Greines, Martin, Stein & Richland, and Paychex Inc., represented by Foley & Lardner.