August 19, 2019

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Payroll Company Not Liable Under Third Party Beneficiary Doctrine

On February 7, 2019, the California Supreme Court determined that an employee cannot sue a payroll company for breach of contract under the third party beneficiary doctrine, and that it is inappropriate to impose a tort duty of care upon a payroll company with regards to the obligations owed to an employee under the applicable labor statutes and wage orders.

After filing a civil complaint against her former employer alleging causes of action for wrongful termination, breach of contract, violations of the Labor Code and related claims, the plaintiff filed several amended complaints that included causes of action against her employer’s independent payroll service provider (“ADP”) based on the payroll company’s alleged status as a joint employer. The trial court subsequently sustained ADP’s demurrer to all causes of action directed against it, without leave to amend. While the Court of Appeal agreed with prior appellate decisions that a payroll company cannot properly be considered an employer of the hiring business’ employee that may be liable under the Labor Code for failure to pay wages (see Futrell v. Payday California, Inc. (2010) 190 Cal.App.4th 1419), it nonetheless held that the employee could maintain causes of action for unpaid wages against the payroll company for breach of the payroll company’s contract with the employer under the third party beneficiary doctrine, as well as negligence and negligent misrepresentation. The Supreme Court disagreed and dismissed the plaintiff’s causes of action against the payroll company without leave to amend.

First, the Court concluded that the plaintiff should not be viewed as a third party beneficiary of the contract between her employer and ADP because, even if the plaintiff was likely to benefit from the contract (which was not clearly alleged in the amended complaint): (i) the motivating purpose behind the contract was to provide a benefit to the employer, not the third party plaintiff, and (ii) permitting employees to name the payroll company as an additional defendant in wage and hour lawsuits would not be consistent with the objectives of the contract and the reasonable expectations of contracting parties. Accordingly, the third party beneficiary doctrine was inapplicable and the employee could not maintain an action against the payroll company for an alleged breach of the contract between the employer and ADP with regard to the payment of wages. Second, the Court decided 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, and consequently that the negligence and negligent misrepresentation causes of action lack merit.

Jackson Lewis P.C. © 2019


About this Author

Eric J. Gitig Employment Lawyer Jackson Lewis Law Firm

Eric J. Gitig is an Associate in the Los Angeles, California, office of Jackson Lewis P.C. His practice focuses on representing employers in workplace law matters, including class and collective actions.

Mr. Gitig has experience handling employment law matters in state and federal court, including wage and hour, discrimination, harassment, retaliation and wrongful discharge claims, including nation-wide class and collective actions.

While in law school, Mr. Gitig participated in the Mediation and Labor & Employment Law Clinics, and was a...


Hazel U. Poei is a Principal in the Los Angeles, California, office of Jackson Lewis P.C. Her practice is focused on single-plaintiff, multi-plaintiff, and class action employment litigation in state and federal courts.

Ms. Poei has also handled arbitration proceedings and matters before administrative agencies such as the Equal Employment Opportunity Commission, the California Department of Fair Employment and Housing, and the California Division of Labor Standards Enforcement. Ms. Poei has also prepared briefing to the United States Supreme Court.