As employers begin 2010 facing a continuing economic downturn, managers and officers should be reminded of the potential personal risks that arise from the nonpayment of employee wages. The legal obligations that apply to corporate employers apply equally to individual officers and managers who exercise control over direct payment of wages and act willfully in failing to pay wages. This can come as a surprise because officers and managers often assume that they are not personally liable for corporate obligations. They also fail to appreciate the broad definition of “wages” and the limited nature of defenses.

If an employer has restricted funds available with which to pay operating expenses, vendor invoices and other costs, individuals who may meet the definition of “employer” should take care to ensure that employee wage payments are given priority to avoid claims imposing personal liability. If payroll costs become burdensome, the solution is not to forbear paying employees the wages they have earned, but to consider other alternatives to reduce expenses, including salary or hours reductions, layoffs (either permanent or temporary) or other cost-cutting measures.

Exposure under the Washington Wage Rebate Act and FLSA

Washington state’s Wage Rebate Act (WRA) provides an employee with a civil cause of action to recover unpaid wages, double damages, costs and attorneys’ fees where his or her employer or “an officer, vice principal or agent of any employer . . . [w]illfully and with intent to deprive the employee of any part of his wages . . . pay[s] any employee a lower wage than the wage such employer is obligated to pay such employee by statute, ordinance, or contract.” RCW 49.52.050, 49.52.070; see Morgan v. Kingen (Wash. 2009). The federal FLSA also provides for double damages in situations where employees are not paid wages owed. 29 U.S.C. § 216(b).

Other forms of payment deemed wages can also form the basis for wage claims under the WRA, for example, unpaid bonuses or commissions that are nondiscretionary and/or vested, severance payments that are promised pursuant to contract, and temporarily deferred salary payments. Washington courts liberally construe the wage-claim statutes to advance the Legislature’s intent to protect employee wages and assure payment. See Schilling v. Radio Holdings, Inc. (2009).

“Employer” includes individuals, officers and managers

Both the federal Fair Labor Standards Act (FLSA) and Washington state’s Minimum Wage Act (WMA) define an “employer” as any person “acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. § 203(d); RCW 49.46.010(4).

Under Washington law, these individuals include those who have power and/or authority to make decisions regarding wages or the payment or withholding of wages. See Ellerman v. Centerpoint Prepress, Inc. (2001).

Similarly, under the FLSA, an individual manager who “exercises control over the nature and structure of the employment relationship” or has “economic control over the relationship” is subject to liability as an employer under the FLSA. See Lambert v. Ackerley (1999). Examples of such control include day-to-day control over the employer’s operations, hiring and firing authority, salary-setting authority, responsibility for maintaining employee records, and of course, the power to manage the company’s finances, including directing the payment or nonpayment of wages. See Chao v. Hotel Oasis, Inc. (2007).

Willful withholding

Managers meeting the definition of employer under the FLSA or MWA can be personally liable for double damages and the employee’s attorneys’ fees where wages are “willfully” withheld. The standard of proving “willfulness” is not high. A court merely looks to see if “the person knows what he is doing, intends to do what he is doing, and is a free agent.” See Schilling v. Radio Holdings, Inc. (1998). In other words, a knowing failure to pay wages is enough to establish “willfulness”; the manager’s actions need not be malicious or the product of any intentional wrongdoing.

Limited defenses to claims of willful withholding of wages

There are only three limited defenses to claims of willfulness under Washington state law: (1) a careless mistake, (2) a bona fide dispute over the obligation to pay wages, and (3) the employee’s knowing submission to the withholding of wages. Individual officers or managers can remain personally liable for wrongful withholding despite the corporate employer’s inability to pay, or financial distress or liquidation in bankruptcy court, even where the bankruptcy trustee will not permit the payment of wages with frozen assets. See Morgan v. Kingen (2009).

For example, in Morgan, the individual officers’ choices to pay one debt over another, to not pay wages owed, and to ultimately file for bankruptcy subjected them to personal liability. The U.S. Court of Appeals for the 9th Circuit reached a similar result under the federal FLSA in Boucher v. Shaw (2009) where individual managers argued that their obligation to pay wages ended with the corporation’s conversion to Chapter 7 liquidation. The court disagreed, noting that the “overwhelming weight of authority” is that managers of a bankrupt corporation with operational control (as described above) can be personally liable under the FLSA for unpaid wages.

Under the FLSA, double damages are the norm, single damages are the exception. However, a court may decline to award double damages if the “employer” acted in subjective good faith and had objectively reasonable grounds for believing the conduct did not violate the FLSA. See Local 246 Util. Workers Union of Am. v. S. Cal. Edison Co. (1996).

The bottom line

In this difficult economy, individual managers who have a decision-making role in paying employee wages or maintain some operational control of the company, even in the event of bankruptcy, must remain vigilant in monitoring the employer’s payroll practices to ensure that employees are paid all wages owed, including nondiscretionary or vested bonuses and commissions, contractually promised severance payments and temporarily deferred wage payments.

If cash flow prevents the prompt payment of wages and other forms of compensation when promised, you should consult legal counsel on the best ways to avoid or minimize the risk of an expensive unpaid wage claim. If you receive a claim for unpaid and owed wages, you should respond quickly to avoid possible exposure to double damages, attorneys’ fees and costs.