In Goonewardene v. ADP, LLC (S238941), the California Supreme Court has created new protections for payroll companies in lawsuits involving claims of labor violations. Although previous case law has held that employees with unpaid wage claims could assert their causes of action against their employers but not their employer’s payroll company, plaintiffs have since attempted to sidestep this limitation with tort-related causes of action and claims for breach of contract under the third-party beneficiary doctrine. Goonewardene effectively puts an end to plaintiffs’ attempts to hold a payroll company liable for their wage and hour claims under these theories, and offers protection to payroll companies from their customers’ employees against claims of negligence, negligence misrepresentation, or breach of contract under the third party beneficiary doctrine.

In Goonewardene, the plaintiff filed suit against her former employer, Altour International, Inc. (“Altour”), alleging a variety of Labor Code violations, as well as wrongful termination and breach of contract. Goonewardene specifically claimed that she was not paid all wages she was due under the Labor Code and applicable wage order.

After the trial court sustained a number of demurrers with leave to amend, Goonewardene named Altour’s payroll company, ADP, LLC (“ADP”) as an additional defendant in her fourth amended complaint. After further demurrers, Goonewardene brought additional claims against ADP in a new complaint for negligence, negligent misrepresentation, and breach of contract. Ultimately, the trial court sustained the defendants’ demurrer to the fifth amended complaint without leave to amend, and Goonewardene appealed. On appeal, the court dismissed all of the plaintiff’s claims against ADP that were based on a theory that the payroll company was a joint employer with Altour as being completely without merit. However, the appellate court permitted Goonewardene’s claims of negligence, negligent misrepresentation, and breach of contract to proceed against ADP. The California Supreme Court reviewed this order and ultimately reversed the appellate court’s ruling.

The Supreme Court first conducted a lengthy and thorough analysis of the appropriate application of the third party beneficiary doctrine in determining whether the same could be properly applied with regard to Goonewardene’s claims. It ultimately decided against such application, reasoning that the elements of third party beneficiary doctrine could not be satisfied. Specifically, the court determined that any benefit of the Altour/ADP contract was directed at Altour, who no longer had to manage its own payroll, not to Altour’s employees. The fact that the employees would incidentally benefit from the Altour/ADP contract was insufficient to permit the employees to sue ADP under California’s third party beneficiary doctrine. Consequently, the Supreme Court reasoned, the motivating purpose of the Altour/ADP contract was simply to assist the employer in the performance of its required tasks, and not to provide a benefit to its employees. Finally, the Court determined that there was no reason to permit a third party employee to sue ADP, because Altour was available and capable of pursuing its own breach of contract claim against ADP if ADP’s conduct exposed Altour to liability. Accordingly, the Supreme Court dismissed Goonewardene’s breach of contract claim as being unsupported by sufficient allegations to satisfy the third party beneficiary doctrine.

With regard to Goonewardene’s negligence claims, the Supreme Court addressed the question of whether ADP owed the employees a duty of care to protect them from the alleged loss. The Court ultimately decided no duty was owed on the basis that (1) California law already provides employees with a full and complete remedy for any wage loss they sustain; (2) the imposition of liability on the payroll company is not needed to deter negligent conduct, because the payroll company is already obligated under the terms of its contract with the employer to act with due care; (3) the payroll company has no special relationship with the employer’s employees that would warrant recognition of such a duty of care; (4) in at least some circumstances, the imposition of a duty of care to the employee might conflict with its duty to the hiring company; and (5) the imposition of a tort duty on a payroll company would “add an unnecessary and potentially burdensome complication to California’s increasing volume of wage and hour litigation.”

Accordingly, Goonewardene should provide significant ammunition to any payroll companies who find themselves caught in a plaintiff’s wage and hour lawsuit against their employer. Indeed, the Supreme Court’s reasoning and explanation in denying Goonewardene’s claims suggests the complete unavailability of negligence claims and the third party beneficiary doctrine, absent substantial and specific allegations that satisfy that doctrine’s elements.