Corporate Form May Not Protect You Personally From Employee Claim of Discrimination

Most business people form a closely held corporation, such as an S corporation or LLC, to insulate themselves from personal liability for their business’ operations.  Until recently, there was disagreement about whether an employee, suing for discrimination in violation of state law, could hold a sole shareholder personally liable for the obligation of the corporation. 

In a recent case from the Third District Court of Appeal, Leek v. Cooper (2011) 194 Cal.App.4^th 399, the employees of a car dealership sued the dealership and its sole shareholder for age discrimination.  The employees/plaintiffs argued the sole shareholder also should be personally liable for their damages because of the level of control he exercised over their employment.  At the trial court level, the shareholder filed a motion for summary judgment seeking to have judgment entered in his favor.  His motion was granted, in effect, releasing the sole shareholder from personal liability for any judgment that may ultimately be entered against the corporation. 

The employees appealed.  The Court of Appeal, however, affirmed the decision of the trial court.  The Court of Appeal held an employee may recover against the sole shareholder of an employer corporation for discrimination in violation of state law, but only where the employee can demonstrate the shareholder is the “alter ego” of the employer.  The term “alter ego” has a very specific meaning under the law.  The Court of Appeal explained that mere control was not enough to establish liability for breach of a duty owed only by an employer, and that the sole shareholder could be held liable only if plaintiffs proved the traditional elements of “alter ego” liability, including a “unity of interest” between the shareholder and the corporation, and an “inequitable result” if the alleged discrimination was treated as an act of the corporation alone.

What does this mean?  In the end, things worked out well for this particular sole shareholder.  But if you are the sole shareholder of your closely held corporation, the disgruntled employee suing you may have a lawyer who has read the Leek decision, and may plead you personally into her complaint.  What does “unity of interest” mean in your particular circumstance? How might one of your employees argue an “inequitable result” if you are not held personally liable?  These are risk management issues best covered in a personal consultation, analyzing the facts and circumstances specific to your business, your insurance coverage, and other tools designed to mitigate risk.  Call me.  Let’s talk.

Nothing in this blog is intended to create an attorney-client relationship.  This article is intended to provide a general overview of the current status of the law for informational purposes only, and is not intended to constitute, or serve as a substitute for, a professional legal consultation.  Laws change every day; please consult an attorney regarding the current status of the law, and how the law affects your specific circumstances. Thank you.