Companies of all sizes, new or mature, sometimes go out of business. “California Or Bust” is legendary in American history, but “bust” sometimes happens despite everyone’s best efforts. If you are an officer or director of a company that is heading toward its final days, there is a critical wind-down task: final paychecks. The simple (but widely ignored) fact is that officers and directors can be held personally liable for unpaid wages under federal and state law in certain circumstances, and the entity’s bankruptcy status often has no effect on individual liability.

With an ongoing business, nobody cares: even if sued, the entity generally steps up to defend or indemnify. However, when that entity has no money, there can be personal exposure with zero backup due to that insolvency (and insurance policies invariably exclude coverage for this category of claims).

So what factors may make or break individual liability?

Click here to view table.

Unfortunately, this is an oft-litigated issue. See Boucher v. Shaw, 483 F.3d 613 (9th Cir. 2007) (individual managers not liable under the Nevada wage statute but vulnerable under the FLSA where those managers were responsible for overseeing cash flow, had significant ownership interests, and controlled plaintiffs’ employment conditions); Chao v. Hotel Oasis, Inc., 493 F.3d 26 (1st Cir. 2007) (individual liability upheld against corporate officer who required employees to attend meetings unpaid and thus was instrumental in “causing” corporation to violate the FLSA.) State labor laws vary but sometimes add even more risk.

What can officers and directors do to protect themselves?

Be sure that there is comprehensive compliance with wage and hour obligations. Some crucial areas for review include whether your workers are properly classified (exempt vs. nonexempt as well as independent contractor vs. employee), whether your workers are timely and fully paid for all time worked, and whether the content of your wage statements are complete.

If your organization is already experiencing financial problems or planning to wind-up operations, don’t take shortcuts. The FLSA defines “employer” too broadly to rely on assumptions that the workforce is loyal and will understand. As a reminder, that definition includes “anyperson acting directly or indirectly in the interest of an employer with relation to an employee.”

Specifically, in times of windup, do not defer wages, delay payroll in order to pay other expenses, or in any way shortchange the workforce in this critical period. Further, if there is risk that payroll cannot be met in the immediate future, then a reduction in hours or layoffs must be considered before employees earn wages that cannot be paid in a timely manner. The failure to do so can be personally expensive.