On February 9, 2019, the California Supreme Court issued its opinion in Goonewardene v. ADP, LLC. The main issue before the Court was whether an employer’s outsourced payroll service could be liable to employees under the applicable labor statutes for failure to pay
wages when due.

In Goonewardene a former employee of Alour International, Inc. sued her former employer for wrongful termination, breach of contract, and violations of the Labor Code. Goonewardene also included a single cause of action against Alour’s payroll company, ADP, LLC, for unfair business practices under the Unfair Competition Law based on its alleged failure to provide her with adequate documentation and records regarding her compensation. The Court of Appeal had concluded that an employee who alleges that he or she has not been paid wages
that are due may maintain tort causes of action for negligence and negligent misrepresentation against a payroll company. However, the California Supreme Court reversed that decision. It held:

. . . in light of a variety of policy considerations that are present in the wage and hour setting, we conclude that it is neither necessary nor appropriate to impose upon a payroll company a tort duty of care with regard to the obligations owed to an employee under the applicable labor statutes and wage orders . . . .

The Supreme Court also went to great lengths to find that employees are not intended third party beneficiaries of the contracts between the payroll company and the employer and, therefore, could not maintain a cause of action for breach of contract against the payroll company.

It is essential that employers seek legal review of the indemnification provisions in their payroll company contracts. If a claim by the employee is due to an alleged error by the payroll company, the indemnification provisions should require the payroll company to indemnify and defend the employer.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.