So you thought only a corporation could be liable for corporate debts? Not when the debt is unpaid wages.
In Boucher v. Shaw, the Ninth Circuit last week confirmed that individuals may be liable for unpaid wages as “employers” under the Fair Labor Standards Act (FLSA). The court also found that the bankruptcy of the corporate employer had no effect on the claims against the individual managers of the corporation.
According to the complaint, the three defendant managers in Shaw had varying responsibilities: (1) one was responsible for handling labor and employment matters at the Castaways Hotel, Casino and Bowling Center (Castaways); (2) one was Chairman and CEO and had a 70% ownership interest in Castaways; and (3) one was CFO, with financial supervision and oversight over Castaways’ cash management and a 30% ownership interest. All three defendants were alleged to have had control and custody of the plaintiff employees, their employment, and their place of employment. The defendants did not challenge their status as employers under the FLSA, but instead sought to assert the protection afforded to the corporation, which had filed for bankruptcy.
The Ninth Circuit held that the bankruptcy protects only the debtor, Castaways. The plaintiffs were not seeking to recover property of the managers that had been pledged to secure Castaways’ debts or that would otherwise impact property of the bankruptcy estate. Castaways had no obligation to indemnify the managers for legal expenses or any judgment issued against them. To the contrary, the managers were independently liable under the FLSA and the automatic bankruptcy stay had no effect on that liability. Accordingly, the Ninth Circuit allowed the case against the individual managers to proceed.
Whether an individual is an “employer” under the FLSA is determined by an “economic realities” test. In addition to a significant ownership interest, assertion of operational control over the major aspects of a corporation’s day-to-day functions and its employment relationships (e.g., hiring, firing, setting compensation, maintaining employment records) has resulted in a finding of “employer” status under the FLSA.
The lesson here? Employees who get shortchanged on their pay are going to look to every possible resource to get paid. There are many options for reducing payroll besides not paying employees. Companies with cash flow problems should consult financial and legal advisors early — before defaulting on payroll obligations.