NEW CASE: Limits Wage and Hour Liability for Payroll Service Providers in California

In a recent case (Goonewarden v. ADP, Inc.), the California Supreme Court unanimously held that a payroll service provider cannot be held liable for errors the payroll service provider makes when issuing payroll check to employees on behalf of the companies with whom it contracts.  The Court also found that payroll service providers do not owe a duty of care to employees to ensure the Labor Code and wage orders are followed.

The Case

Following her termination from her employment, the plaintiff filed a lawsuit claiming that her former employer had failed to pay her properly during her employment and, subsequently, terminated her for bringing these problems to the employer’s attention.  Ultimately, the plaintiff also included the company’s payroll service provider (ADP) as a party to the lawsuit claiming that ADP violated the California labor code because it failed to provide her with adequate documentation and records regarding her compensation.

ADP challenged its inclusion in the lawsuit, claiming that, as a third party, the plaintiff could not sue ADP for problems arising from the contract between ADP and the employer (in legal terms, the plaintiff was not a “third party beneficiary” to the contract and has no standing to maintain a claim against ADP).

The California Supreme Court agreed with ADP and found that the plaintiff could not be considered a third-party beneficiary of the contract between her employer and ADP, and therefore could not maintain a breach of contract, negligence, or negligent misrepresentation claim against ADP.

This decision suggests that California courts may be skeptical of holding contractors liable under the third-party beneficiary doctrine in cases brought by the employees of parties to which they have service agreements.

Additionally, this case is significant in the fact the Court demonstrated that it is hesitant to expand the maze of wage and hour law compliance. Employers should stay involved in all payroll activities and do their due diligence to ensure that payrolls are accurate and compliant.