The chief justice wrote that allowingpayroll companies to be brought into such cases would likely mean“an unnecessary and potentially burdensome complication.” (Photo: Jason Doiy/ALM) 

ADP has prevailed before California's high court, which struck adecisive blow for payroll companies in finding that employeescould not bring claims for their employers' failure to pay wagesunder California labor laws.

The California Supreme Court's unanimous decision on Feb. 7 reverses a lowerappellate court that had allowed plaintiff Sharmalee Goonewardeneto proceed with third-party breach-of-contract claims, and claimsof negligence and negligent misrepresentation, against ADP.

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Roseland-based ADP was the outside company who handled payrollfor Altour InternationalInc., the travel agency where Goonewardene worked.

“Inasmuch as an employee can obtain a full recovery for his orher economic loss in a wage-and-hour action against the employeralone, the substantial burden to the judicial system that wouldresult from the addition of a tort action against the payrollcompany is likely to outweigh any potential benefit,” wrote ChiefJustice Tani Cantil-Sakauye.

The chief justice wrote that allowing payroll companies tobe brought into such cases would likely mean “anunnecessary and potentially burdensome complication to California'sincreasing volume of wage and hour litigation.”

The decision is a win for ADP and its lawyers at Morgan, Lewis & Bockius. SanFrancisco partner Robert Lewis, who argued at the SupremeCourt for ADP, referred a request for comment to his client. ADPrepresentatives weren't immediately available.

Glen Broemer, the Jersey City lawyer who representsGoonewardene, said in an email that he wasn't available forcomment.

No separate tort

Grant Alexander, a commercial and employment litigator atAlston & Bird in Los Angeles who has beenmonitoring the case, called the ruling “good news for companies” inCalifornia.

“I think it closes a loophole that plaintiffs lawyers weretrying to explore to try to bring in another deep pocket intowage-and-hour litigation,” said Alexander, who isn't involved inthe underlying case. “Had it gone the other way, I don't know whatcompanies like ADP would have done.”

The Feb. 7 decision reverses a 2016 ruling from the Second District Court ofAppeal, which found that Goonewardene could pursuebreach-of-contract claims against ADP under the theory that she wasa third-party beneficiary of the contract between ADP and heremployer for payroll services. But in theopinion, Cantil-Sakauye rejected the lower court'sanalysis of the third-party beneficiary doctrine.

“When an employer hires a payroll company, providing a benefitto employees with regard to the wages they receive is ordinarilynot a motivating purpose of the transaction,” the chief justicewrote. “Instead, the relevant motivating purpose is to provide abenefit to the employer, with regard to the cost andefficiency of the tasks performed and the avoidance of potentialpenalties.”

While the chief justice found that employees have “an importantand fundamental interest” in receiving accurate and timelypayment of wages, she found that a variety of policy considerationsweighed against imposing a tort duty of care to employeeson payroll companies.

“Given the employer's clear and direct liability for any wageloss caused by the payroll company's negligence in calculating thewages that are due, the imposition of a separate tort duty of careon a payroll company is generally unnecessary to adequately protectthe employee's interests,” she wrote.

ADP drew amicus backing from a number of payroll industry groupsand competitors, including the National Payroll ReportingConsortium and American Payroll Association, represented by counselat Greines, Martin, Stein & Richland, and PaychexInc., represented by Foley & Lardner.

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