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Personal liability for unpaid wages is a significant issue for companies and management as they reach a liquidity crisis or insolvency - and it is in this context that the laws imposing personal liability on corporate principals for unpaid wages acquire their sting. Corporate agents' personal liability for unpaid wages derives from an overlay of U.S. federal and state laws and regulations. State law varies widely on whether officers and directors of corporations can be held personally liable for wages. Certain states, such as New York, Washington1 and Illinois,2 have held managers, officers and directors personally liable, and New York has imposed criminal penalties.3 Other states, such as California and Nevada, have refused to extend personal liability to corporate agents for claims based on state wage law.
There are a host of federal laws designed to address different employment issues. Because these laws have different definitions of "employers," those who can be liable under these laws vary significantly. To highlight two key statutes, the Federal Worker Adjustment Retraining and Notification Act (the WARN Act) is designed to prevent mass layoffs but has not been interpreted to impose personal liability on individual corporate agents. On the other hand, the Fair Labor Standards Act of 1938 (FLSA),4 which guarantees employees federal minimum wages and overtime compensation, broadly imposes personal liability on officers and directors if certain additional factors exist. However, the FLSA' s coverage is limited and does not cover claims for immediate payment of contractual wages, accrued vacation pay and other accrued benefits to which employees may be entitled under state law.
In Boucher v. Shaw,5 the Ninth Circuit recently held (as many other circuits had) that the FLSA 's definition of "employer" includes corporate agents who have economic control or exercise control over the nature and structure of the employment relationship, based on the circumstances and economic reality of the relationship. Boucher at 9739. This broad definition of "employer" under the FLSA is cause for real concern for corporate agents, particularly since the director/officer and employment practices of insurance policies frequently exclude coverage for claims based on the FLSA or similar state laws.6 However, while Boucher is significant in that it clearly establishes a corporate agent's personal liability under the FLSA in the Ninth...