Aug 22, 2009

Managers May Be Personally Liable for Unpaid Wages -- Even If Company Goes Bankrupt

Last month, the Ninth Circuit Court of Appeals decided that a group of employees could pursue claims for unpaid wages against three individual managers of a company that was in bankruptcy. In Boucher v. Shaw, the Court reinstated a complaint brought by several employees against their former managers at the Castaways, a casino and entertainment center in Nevada. The Castaways was still operating and in Chapter 11 bankruptcy when the employees lost their jobs; shortly afterwards, the bankruptcy was converted to a Chapter 7, and the company was liquidated.

The employees claimed that they never received their accrued vacation and holiday pay and that they were paid late (or not at all) for their final weeks of work. The employees' union also sued to recover dues that had been withheld from employee paychecks. Rather than suing the bankrupt company, the employees sued three individuals: the company's CEO (who owned 70% of the business), the person responsible for handling labor and employment  matters at the company (who owned the remaining 30%), and the CFO (a nonowner). All claimed that they couldn't be sued individually -- and, even if they could, that the lawsuit was barred by the automatic stay, which protects those in bankruptcy from creditor efforts to collect their debts.

The Court rejected both of these arguments and allowed the employees' lawsuit to go forward. The Court found that all three of the individuals were "employers" under the Fair Labor Standards Act (FLSA), because all had control over the employment relationship. The Court also found that the automatic stay protected only the Castaways itself, not the individual owners and managers.

Given the number of businesses that are going under, this case is a timely reminder that employee wages must be paid, regardless. If the company itself declares bankruptcy, individual managers can be sued. Even if those managers declare personal bankruptcy, unpaid wages are considered a "priority debt," which means they jump to the head of the repayment line along with unpaid child support and tax debts.