Of late, and often out of necessity, many small businesses are playing a similar game. Their own clients are behind in paying and so they themselves can pay only the most immediate bills. There are obvious risks here but many businesses are unaware of how perilous this sitution can be if the invoices that go unpaid are employee wages or benefits.
Last week, I had a call from a law school classmate whose corporate client was being sued by two employees who had allegedly agreed to work for free for some undefined period of time until the company’s clients paid their invoices. Nothing was in writing, just a conference room agreement. Employment law is not my colleague’s forte and he wanted me to clarify his reading of the statute. Unfortunately, he understood it all too well.
Washington State has a statute, RCW 49.52, focused on the “willful withholding of wages.” It entitles any employee to double damages plus attorney fees when his employer “willfully” withholds any portion of his wages. The presumption is that such witholding is always willful and “willful” is defined as “knowing and intentional, … neither accidental nor as a result of bona fide dispute.” Double damages and fees may only be avoided where lack of payment was due to carelessness (rather than being volitional), or where a “bona fide” dispute existed regarding the payment of wages. Schilling v. Radio Holdings, Inc., 136 Wn.2d 152, 160-61 (1998).
Financial inability to pay is also insufficient to prevent a finding of willfulness and avoid double damages. Id.
Further, company officers and senior managers can be held personally liable for these sums if the company’s coffers are empty. The statute specifically includes “[a]ny employer and any officer, vice principal or agent of any employer who shall violate any of the provisions” of RCW 49.52.
Even bankruptcy won’t save you. In 2009, the Washington State Supreme Court held that corporate officers and senior managers (eg., the CEO and the CFO) continue to face personal liability for unpaid wages, even when the corporation is liquidated in bankruptcy court. The Court reasoned that prior to bankruptcy, the officers controlled the payment of wages. Thus, it was appropriate for them to be personally liable. Further, because the officers controlled how the corporation’s money was used, and made such decisions as whether to file for bankruptcy or close the business and pay debts, the Court held that the choice not to pay wages was willful and intentional. See Morgan v. Kingen, 166 Wash.2d 526, 535 (2009).
Can Employers, Officers and Senior Managers Do Anything to Protect Against Liability for Unpaid Wages, Penalties and Fees?
So, when things are so bad that the company doors will close unless employees forego some or all of their salary, how does an employer handle the situation? Well, the statute does allow for “authorized withholding” such that an employer can “withhold or divert any portion of an employee’s wages when … [the] deduction has been expressly authorized in writing in advance by the employee for a lawful purpose accruing to the benefit of such employee … [as long as the] employer derives no financial benefit from such deduction and the same is openly, clearly and in due course recorded in the employer’s books.” RCW 49.52.060.
My suggestion is that the writing be as specific as possible and that a new agreement be entered into for every pay period in which the employer is asking the employee to agree to the withholding. Further, I find that there is a great deal of good will incurred when there is full disclosure to the employees and when the senior officers and managers themselves are also entering into such an agreement with the company. Nothing goes over more poorly than when the sacrificing employees find out the company president is still buying a new yacht with his annual bonus.
Some additional thoughts:
- Train those responsible for payroll functions to make sure that paychecks are timely issued, particularly when an employee is resigning or being terminated, or when the company is downsizing.
- Adopt a policy requiring employees to promptly report any problems with paychecks.
- Unless a bona fide dispute exists over the payment, promptly correct any payroll problems by paying the employee to avoid liability for penalties and attorney’s fees. (As an aside, the bona fide dispute agrument is limited and usually only successful with discretionary bonuses or commissions or the like.)
- Carefully evaluate whether the company’s current insurance policies would provide a defense if the company or its officers and managers were sued for failure to timely pay wages. If the company has no coverage, consider whether to purchase such coverage.
- If the company is having financial difficulties, consider whether the company’s governing documents (such as articles or bylaws) address whether the company is responsible for defending and indemnifying managers who are sued personally for failing to pay wages.
