Individual Managers May Be Personally Liable for Unpaid Wages When an Institution FailsMike King
February 1, 2011 — 2,248 views
Question: We were just the human resources manager and chief financial officer for the bank, so how can we be personally responsible for employees’ unpaid wages?
Answer: By law, “any person acting directly or indirectly in the interest of an employer in relation to an employee” is an “employer” under the Fair Labor Standards Act and individually liable for unpaid wages.
Most managers of financial institutions would be shocked to learn that they may be personally responsible for unpaid wages to employees. Why do we have corporations and limited liability companies if individual managers may still be personally responsible for the business obligations? The idea that you might be personally responsible to pay unpaid wages to the employees of a failed enterprise seems wrong, especially if the business failed to pay you part of your compensation as a manager. Nevertheless, such personal liability for unpaid wages may be imposed under the Fair Labor Standards Act.
The case of Boucher v. Shaw, No. 05-15454 (9th Cir. July 27, 2009), demonstrates the risk for managers of a business. The Boucher case said that managers may be personally liable for the employees’ unpaid wages.
In the Boucher case, former employees of the Castaways Hotel, Casino and Bowling Center sued to recover unpaid wages from the Chairman and Chief Executive Officer, the Human Resources Manager, and the Chief Financial Officer of the limited liability company running the Castaways.
The Castaways filed a Chapter 11 bankruptcy reorganization case on June 26, 2003. The individual plaintiffs, Thelma Boucher, Ardith Ballard, and Joseph W. Kennedy III were discharged from their jobs in January 2004. In February, 2004, the Castaways Chapter 11 reorganization bankruptcy was converted to a Chapter 7 liquidation and the Castaways went out of business.
The plaintiffs sued in Nevada State Court for unpaid wages for themselves and other employees of Castaways. The plaintiffs alleged that the CEO, the HR Manager, and the CFO each had “custody or control” over the “plaintiffs, their employment, or their place of employment at the time that the wage were due.” The Court found that the claims did not state viable claims under Nevada law. Nevertheless, the Ninth Circuit Court of Appeals found that the ex-employees had viable claims under the Federal Fair Labor Standards Act.
The Court noted that the Fair Labor Standards Act requires that “[e]very employer shall pay to each of his employees who in any work week is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce,” a minimum wage. The damages for not paying employees are “the amount of their unpaid minimum wages, or their unpaid overtime compensation, as the case may be, and in an additional equal amount as liquidated damages.” See 29 U.S.C. §§ 206, 207 and 216(b).
But the limited liability company was out of business and bankrupt, so what good would the damages be for the ex-employees? Well, the Fair Labor Standards Act defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee . . . .” 29 U.S.C. § 203(d).
The Court noted that the definition of “employer” for the Fair Labor Standards Act is not limited to the common law concept of “employer.” Rather, the term employer “is to be given an expansive interpretation in order to effectuate the FLSA’s broad remedial purposes.” The Court wrote that: “The determination of whether an employer-employee relationship exists does not depend on ‘isolated factors but rather upon the circumstances of the whole activity.’” The Court looked to the “economic reality” of the relationship. Thus, where an individual manager exercises “control over the nature and structure of the employment relationship,” or “economic control” over the employment relationship, then that individual manager “is an employer within the meaning of the Act, and is subject to liability.”
So if you have economic and operational control over the employees, you will personally be an “employer” under the Fair Labor Standards Act and potentially responsible for unpaid wages.
The managers in the Boucher argued that the Chapter 7 bankruptcy liquidation ended any responsibility they had as employers to pay the employees. The Court noted that generally, the automatic stay in bankruptcy protects only the debtor and property of the debtor or property of the bankruptcy estate. The automatic stay in the Bankruptcy Code “does not protect non‑debtor parties or their property.” The Castaways’ bankruptcy had no effect upon the unpaid wage claims against the individual managers. The Court wrote that “the plaintiff’s statutory claim against the individual managers is unrelated to any of the Castaways’ debts.” “To the contrary, the managers are independently liable under the FLSA, and the automatic stay has no effect on that liability.” The Court concluded:
The overwhelming weight of authority is that a corporate officer with operational control of a corporation’s covered enterprise is an employer along with the corporation, jointly and severally liable under the FLSA for unpaid wages.
So what should you do if you are a corporate officer or business entity manager with operational or economic control over employment relationships? First, scrupulous compliance with the Fair Labor Standards Act is essential. Make sure that the employees are properly paid all appropriate wages and overtime compensation. Minimum wage provisions and overtime compensation requirements must be learned, updated and followed.
Second, you cannot allow yourself to be an officer or manager with operational or economic control over employees when the business violates the Fair Labor Standards Act by failing to deliver paychecks. You do not want to be the manager in charge when the Fair Labor Standards Act violation occurs.
If your financial institution needs additional information concerning exempt employees, overtime provisions, minimum wage standards for general compliance with the Fair Labor Standards Act or other employment laws, please do not hesitate to call me.
GAMMAGE & BURNHAM, P.L.C.
Michael R. King
Michael R. King is a founding partner of Gammage & Burnham, P.L.C., a Phoenix law firm with diverse areas of emphasis. His practice primarily centers around bankruptcy and creditors' rights, commercial litigation, including uniform commercial code cases, and real estate and business law. Mr. King is a former of the Creditor/Debtor Rights Committee and is a current member of the Bankruptcy, Real Estate and Construction Law Sections of the State Bar of Arizona. He is the past chair of the Board of Trustees of the Maricopa County Bar Foundation. Mr. King is an active alumnus of The University of Arizona, where he received his B.A. and J.D. degrees, with distinction and high distinction.