In a victory for payroll companies, the California Supreme Court recently held that payroll providers aren’t on the hook for paycheck errors and wage and hour violations. Instead, the employer alone is liable for wage and other pay violations.
The underlying lawsuit was brought by Sharmalee Goonewardene against her employer, a travel company, for missed overtime, breaks and other wage claims.
However, Goonewardene didn’t just sue her employer; She also sued her employer’s payroll provider, ADP, claiming that ADP failed to provide her adequate pay documentation and records and that this was a breach of contract, an unfair business practice, and negligent. As an employee of the tour company, Goonewardene argued that she was a beneficiary of the payroll service agreement between her employer and ADP. The payroll errors on Goonewardene’s time sheets amounted to $6,144.
A lower court agreed with Goonewardene and was willing to let her claims against ADP go to trial, but ADP appealed to the California Supreme Court which sided with ADP in a unanimous decision.
Employer is the Responsible Party
The California Labor Code holds the employer responsible for accurate wage statements and that responsibility can’t be passed on to the payroll company. The Court held that payroll service providers do not owe a duty of care to employees to ensure the California Labor Code and wage orders are followed.
Because employers are directly liable for any wage loss caused by the payroll company’s errors in calculating wages, imposing a separate duty of care on a payroll company is “generally unnecessary to adequately protect the employee’s interests,” said the Court.
What does this decision mean for businesses in California who use third-party payroll providers? Employers shouldn’t assume “the payroll provider must have gotten it right” when it comes to employee paychecks.
California law has specific wage and hour requirements not found in other states—such as a detailed wage statement (pay stub) requirement. Since compliance is the employer's responsibility, employers should make certain that their payroll providers are meeting state law requirements. Before using a new payroll vendor, take a look at their practice and the format and content of their wage statements. Check out our Payroll partners. If you have been using one vendor for a while, consider a self-audit to make sure that there isn’t a pattern of payroll/paystub errors—perform an audit with an experienced HR professional (call CEA!) or legal counsel.