Employers in Washington who fail to timely pay wages to an employee are liable for statutory penalties equal to twice the unpaid wages plus attorney’s fees. Even when an employer seeks bankruptcy protection, officers and senior managers remain personally liable for the unpaid wages, statutory penalties and attorney’s fees. This rule was recently reaffirmed by the Washington State Supreme Court and the Ninth Circuit Court of Appeals in two separate cases involving bankrupt employers. In light of the current downturn in the economy, these cases are a timely reminder of the personal risks that officers and senior managers face.
Both Washington’s Minimum Wage Act (MWA) and its federal counterpart, the Fair Labor Standards Act (FLSA), provide for penalties and attorney’s fees when an employer fails to timely pay wages to its employees. These same penalties apply equally to officers and senior managers with control over payment of wages. The recent cases illustrate how officers and managers working for insolvent companies may expose themselves to personal liability.Under state law, it is a misdemeanor for an employer to “willfully” deprive an employee of any part of his wages, and/or pay any employee a lower wage than the wage such employer is obligated to pay by statute, ordinance or contract. RCW 49.52.050. Under the MWA, an employee who has willfully been deprived of wages may sue for the unpaid wages and double the unpaid wages and reasonable attorney’s fees. RCW 49.52.070. Double damages and fees may be avoided where lack of payment when the deprivation is careless versus intentional. They can also be avoided when there is a “bona fide” dispute regarding the payment of wages. Schilling v. Radio Holdings, Inc., 136 Wn.2d 152, 160-61 (1998). Willfulness may be found when the refusal to pay is “volitional,” even if it is not malicious. Id. at 159-60.
If the employer is unable to pay wages, the employee can also recover the wages, double damages and fees from any officer or manager of the employer who exercises control over the direct payment of the wages and acts pursuant to that authority when failing to pay wages. Ellerman v. Centerpoint Prepress, Inc., 143 Wn.2d 514 (2001). Both the employer and individual manager are liable for double damages and fees if found to have willfully withheld wages. The financial inability to pay wages is not a defense. Schilling, at 166.
In Morgan v. Kingen, 210 P.3d 995 (Wash. 2009), the Washington State Supreme Court reaffirmed that officers continue to face personal liability for unpaid wages under Washington’s MWA, even when the corporation is liquidated in bankruptcy court. The officers there sought to avoid personal liability for unpaid wages based on the conversion of the employer’s Chapter 11 reorganization to a Chapter 7 liquidation. Rejecting this defense, the Court ruled that the Chapter 7 liquidation of the corporation did not provide the officers a means to escape personal liability. The Court reasoned that prior to converting to a Chapter 7 liquidation, the officers controlled the payment of wages. Thus, it was appropriate for them to be held personally liable. Further, since the officers controlled how the corporation’s money was used, and made decisions such 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 by those officers.
The Ninth Circuit Court of Appeals recently reached a similar result under the Fair Labor Standards Act, which applies to employers engaged in interstate commerce. Boucher v. Shaw, 2009 WL 2217517 (9th Cir. 2009). Under the FLSA, an employer is liable for unpaid wages and an additional amount for liquidated damages, as well as attorney’s fees. Under the FLSA, individual managers who exercise “control over the nature and structure of the employment relationship” or “economic control” over the relationship may be personally liable. See Lambert v. Ackerly, 180 F.2d 997, 1011-12 (9th Cir. 1999).
In Boucher, the Ninth Circuit Court of Appeals ruled that a corporation’s managers can be held personally liable under FSLA for wages that a corporation failed to pay to employees before filing for bankruptcy. Like in Boucher, the managers argued that their duty to pay employees ended when the business’s Chapter 11 bankruptcy reorganization was converted to a Chapter 7 liquidation. In rejecting this argument, the Ninth Circuit held that the U.S. Bankruptcy Code’s automatic stay of claims against the bankrupt entity did not extend to the separate claims against the managers, but instead only to those claims against the debtor corporation. The result would be the same whether in Chapter 11 or Chapter 7, according to the Court. Further, imposing personal liability would not undermine the Bankruptcy Code’s automatic stay intended to preserve the estate’s assets, because the corporation’s assets were not affected by the independent claims against the managers. Significantly, the Court noted that if the managers’ liability were to affect the property of the bankruptcy estate, by virtue of the corporation’s agreement to indemnify or by payment of the liability from a director’s and officer’s insurance policy, it might be necessary for the employees seeking wages to proceed against the non-debtor party through the bankruptcy proceedings.
The Lesson: So how do employers, officers and managers protect themselves from liability for unpaid wages? Of utmost importance is ensuring that those responsible for payroll functions to issue paychecks in a timely manner, particularly when an employee is resigning or being terminated, or when the company is downsizing. In the absence of a bona fide dispute over the obligation to pay the employee, promptly correct any payroll problems by paying the employee to avoid liability for penalties and attorney’s fees. Finally, 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.
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