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This year’s rash of corporate fraud and accounting shenanigans have put business executives in the line of fire. But while they’re increasingly finding themselves on the hook for their accounting practices, a couple of recent developments in California’s employment law could broaden individual liability when it comes to how supervisors conduct day-to-day business operations. In June, the Division of Labor Standards Enforcement issued an opinion letter, written by Miles Locker, an attorney for the California Labor Commissioner, holding an officer of a company personally responsible for the unpaid wages of an employee. That could potentially put the assets of the executives and venture capitalists of failed dot-coms at risk. Also, in July, the First District Court of Appeal ruled that managers who retaliate against their employees can be held personally liable. Unlike discrimination, which is shielded from individual liability, the court found in Walrath v. Sprinkel, 02 C.D.O.S. 6015, that retaliation exposes individual managers. “I think the impact is substantial in the sense that any time an individual manager or an executive can be personally liable, that gets people’s attention,” said Bingham McCutchen labor and employment partner James Severson. “It’s another example of how corporate managers have to watch their Ps and Qs.” There’s little financial benefit for plaintiffs in Walrath, since it’s the corporations that typically have the deep pockets, not the individual managers. But by adding retaliation claims against individuals to their lawsuits, plaintiffs have a way to prevent out-of-state employers from removing the case to federal court. This can have big strategic significance, since state courts only require a 9-3 jury verdict, whereas federal jury verdicts must be unanimous. “I would suspect that plaintiffs lawyers are pleased,” said Mark Rudy, who works both as a neutral mediator and plaintiffs attorney for employment matters. Supervisors are shielded from individual exposure for discrimination through the California Supreme Court decision, Reno v. Baird (1998) 18 Cal.4th 640, on the logic that actions that could be labeled discriminatory can arise out of ordinary management duties like hiring, firing and making performance evaluations. “They were trying to make clear that a normal employment decision shouldn’t be the subject of individual exposure,” said Wilson Sonsini Goodrich & Rosati employment partner Fred Alvarez. “Otherwise supervisors will be afraid to make decisions.” Harassment, on the other hand, has no legitimate work-related motive, and thus is offered no protection from individual liability. Retaliation falls somewhere in the middle, sometimes more closely resembling discrimination and other times harassment. “What should happen after Reno is that the court should analyze whether the retaliation claim is conduct that’s been defined as harassment or conduct that’s been defined as discrimination and make the analysis that way,” said employment partner Lynne Hermle of Orrick, Herrington & Sutcliffe. A request for the Supreme Court to de-publish the decision, by management-side law firm Jackson Lewis, is still pending. Employment attorneys say they haven’t seen a flood of retaliation claims naming individuals yet. But some say they won’t be surprised to see them coming down the pike. “In this whistleblower environment that we’re all sort of struggling with now,” said Wilson’s Alvarez, “you’ll start to see more and more of these claims made, and more individuals named.” Company executives could also find themselves facing liability for unpaid wages. Locker stated in the opinion letter that an individual officer of a company, along with the company, was liable for an employee’s unpaid wages. The case involved Barry Vincent Lyou, an employee at CentreCom Inc. who signed an agreement to defer his wages in order to keep the struggling company afloat. When the business ultimately failed, it was unable to pay Lyou the deferred wages, prompting Lyou to file a complaint against both the company and Donald Feuer, the executive with whom he signed the agreement. In holding Feuer jointly responsible with the company for Lyou’s wages Locker reasoned that the executive fit the definition of employer, since he exercised control of an employee’s working conditions. According to Preston Gates & Ellis employment partner Michael McCabe, this could have numerous implications in today’s world of dot-com failures. “If in fact employees can bring a claim individually against an officer, there’s another available pocket, even if the company has lost its assets,” said McCabe. And since it’s not unusual for venture capitalists to sit on company boards and direct how funds are allocated, they could theoretically be fair game as well. Of course, opinion letters from the Division of Labor Standards Enforcement are not binding precedent, nor are rulings from state superior courts — where the case is now headed. But if the case were to make it to the court of appeal, based on the same legal principles, the ruling could have an impact. “If you read this analysis, it’s intellectually supportable,” said McCabe.

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