Managers Personally Liable For Unpaid Wages

(Published November 2009)

 

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Casino managers came up short when a federal appeals court ruled that they were employers under the Fair Labor Standards Act (FLSA), which made them personally liable to employees for their unpaid wages. The court also ruled that the company's bankruptcy and total liquidation didn't absolve the managers of their FLSA liability. [Boucher v. Shaw, Nos. 05-15454, 05-15702, 9th Cir. (2009).]

 

Ladies and gentlemen, place your bets. Employees were fired about a month before the casino filed for Chapter 7 liquidation under the bankruptcy laws and ceased operations. They sued three managers personally for their unpaid wages — the Chairman and CEO, who owned 70% of the company; a manager who was responsible for handling labor and employment matters; and the CFO, who owned the remaining 30%. Employees' allegations: The managers were personally liable for the unpaid wages because they had custody or control over their employment at the time their wages were due. Managers' defense: There was no personal liability under the FLSA. Instead, the employees' lawsuit should be directed to the bankruptcy trustee, since their claims, which are against the employer, ceased when it liquidated.

 

Managers had significant control. The appellate court ruled for the employees. Court: Economic reality is the touchstone of whether there's an employment relationship between employees and managers. Where an individual exercises control over the nature and structure of the employment relationship, or exercises economic control over the relationship, that individual is an employer for FLSA purposes. The managers exercised control, the court said, due to their significant ownership interest, and their operational control over significant aspects of the corporation's day-to-day functions.

 

As for the managers hiding behind the bankruptcy estate, the court said that it made no difference whether the company was bankrupt. Reason: A company's bankruptcy doesn't affect the liability of individual managers under the FLSA. The bankrupt company isn't the defendant, and the defendants aren't debtors. The case proceeds to trial, where employees must prove how much they're owed.

 

DON'T SPIN THIS ROULETTE WHEEL: These managers will probably be on the hook for even more, since the FLSA authorizes employees to recover liquidated, or double, damages in addition to the back wages. And liquidated damages are the rule, rather than the exception. Companies in distress often postpone paying employees. Declaring bankruptcy and ceasing operations isn't a defense to personal liability under the FLSA, as the court noted. You might want to tuck this case away, in case you catch wind of something similar at your company.