PERSONAL LIABILITY OF BUSINESS OWNERS AND MANAGERS FOR WAGES OWED

Business owners and managers can be held personally liable for unpaid wages under both the federal Fair Labor Standards Act ("FLSA" and the "Act") and New Hampshire wage and hour laws.

The FLSA provides that an "employer" is liable for wages owed to an employee under the Act. The FLSA does not, however, define the word "employer." Rather, using the very word it is defining, the Act states that an "employer" includes "any person acting directly or indirectly in the interest of an employer in relation to an employee." 29 U.S.C. §302(d). In 1947, the U.S. Supreme Court noted that the FLSA has "no definition … as to the limits of the employer-employee relationship…." Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947). Subsequently, the Court instructed that determination of whether an individual is an employer or an employee should be based on "economic reality rather than technical concepts." Goldberg v. Whitaker House Coop., 366 U.S. 28, 33 (1961).

When applying the "economic reality test" to determine whether an individual company owner or manager is an "employer" personally liable for unpaid wages courts consider the "totality" of the "individual's level of involvement with the corporation's day to day operations, as well as their direct participation in creating or adopting the unlawful pay practices." In general, when making this assessment, courts consider whether the person:

1. Had the power to hire/fire employees;
2. Supervised and controlled employees' work schedules;
3. Determined the rate, method, or timing of employees' compensation;
4. Maintained employment records; or
5. Had operational control which directly or indirectly effected payment of employee compensation.

Reining in the breadth of the above factors a bit, the First Circuit Court of Appeals (covering New Hampshire, Maine, Massachusetts, Rhode Island and Puerto Rico), has ruled that company owners and managers will only have individual liability for unpaid wages when their conduct "contributed to violations of the Act…" Baystate Alternative Staffing, Inc. v. Herman, 163 F.3d 668, 678 (1st Cir. 1998). More recently, in Manning v. Boston Medical Center (August 1, 2013), the First Circuit similarly ruled that a plaintiff stated a viable FLSA claim against a company's chief executive officer where he accused her, among other things, of being involved with compensation-related matters within the company and also controlling "the corporation's financial affairs and "caus[ing] the corporation to compensate or not to compensate employees in accordance with the FLSA."

Similar to the First Circuit's ruling in Baystate and Manning, New Hampshire's wage/hour laws impose liability for unpaid hourly and salary wages on the "officers of a corporation and any agents having the management of such corporation who knowingly permit the corporation to violate the provisions of RSA 275:43, 44" by deeming such individuals "to be the employers of the employees of the corporation." NH RSA 275:42 V.

Takeaway: Owners and managers of corporations should be aware that the corporate shield may not protect them from personal liability for wage claims, especially when the owner or manager's own actions or inactions directly or indirectly contributed to the corporation's failure to pay wages owed. Consequently, high-level corporate executives who have operational responsibility should be mindful of the company's compliance with state and federal wage and hour obligations.

Contact any member of our Labor & Employment law group with any questions on potential personal liability for a wage claim, or for assistance on any aspect of responding to a wage claim.

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