Companies in severe financial distress often seek refuge in bankruptcy. However, while bankruptcy may offer the company-debtor protection against claims of unpaid wages, it does not insulate individual officers, directors and managers from personal liability under the Fair Labor Standards Act ("FLSA") for such claims. In Boucher v. Shaw, the Ninth Circuit Court of Appeals determined that a bankrupt casino's managers – its Chairman and CEO, Chief Financial Officer, and a third manager – could be individually liable for FLSA violations even though the casino had commenced bankruptcy proceedings.
The plaintiffs in Boucher were three former employees of the Castaways Hotel, Casino and Bowling Center in Las Vegas. During the plaintiffs' employment, Castaways filed for Chapter 11 bankruptcy reorganization but continued to operate. Six months after filing for reorganization, the plaintiffs were discharged, and a month later, Castaways ceased operations. The plaintiffs sued the managers personally, seeking to recover unpaid wages for themselves and a class of former Castaways employees.
Under the FLSA, individuals who exercise "control over the nature and structure of the employment relationship" or "economic control" over the relationship are "employers" and thus subject to personal liability. The defendants did not dispute that they were "employers" under the FLSA. However, they argued that because the company was protected against wage claims by bankruptcy, they were entitled to the same protection.
The Ninth Circuit disagreed, and held that bankruptcy protection extended only to the debtor (i.e., the company) and not to the individual managers. The court viewed the managers' liability as independent and not merely derivative of the company's FLSA liability. However, the court suggested that if the managers' FLSA liability affected the bankruptcy estate – such as by a requirement that the company indemnify the managers or by payment of the liability from a director's and officer's insurance policy – it may be necessary for plaintiffs to proceed against the managers through the bankruptcy proceedings.
In this difficult economic climate, the Boucher decision is significant to both companies in financial difficulty and their management-level employees who control decisions about wages. The payment of unpaid wages should always be a top priority for faltering companies, and careful planning with respect to reserving sufficient cash to pay wages will minimize the risk of personal liability in this area.