Effective January 19, 2016, New York’s amendment to Section 630 of its Business Corporation Law (NYBCL) makes the 10 largest shareholders of any privately held corporation jointly, severally, and personally liable for “all debts, wages or salaries due” to the corporation’s employees for services rendered. Because Section 630 was already applicable to shareholders of privately held corporations incorporated in New York, the impact of this amendment will be felt by shareholders of foreign corporations.
The amendment to Section 630 of the NYBCL is similar to a 2014 amendment to Section 609 of New York’s Limited Liability Company Law (NYLLCL), which provides that the 10 “members” with the largest percentage ownership interest in a New York limited liability company (LLC) are jointly, severally, and personally liable for “all debts, wages or salaries due” to the LLC’s employees for services rendered.
As introduced above, the amendment to the NYBCL extends application to shareholders of privately held corporations incorporated anywhere. The amendment may therefore surprise unsuspecting shareholders with personal liability for payroll-related business errors. Further, when one of the shareholders is an intermediate holding company, the question will become whether the courts will “look through” the entity to hold liable the individuals who own the holding company.
Unfortunately, there is no clear precedent indicating how the courts will decide that issue. In the sole case on point, Pope v. Halloran, a former employee of a private company brought suit for unpaid wages and commissions against an individual who owned the close corporation that was the sole shareholder of that private company. The majority affirmed dismissal on procedural grounds and therefore did not reach the issue of personal liability. However, the dissent reasoned persuasively that Section 630 imposed personal liability because the shareholder company was “merely a conduit through which he exercised control” over the defunct private entity.
“…private equity funds that utilize intermediate holding companies or have portfolio companies organized as corporations doing business in New York must take care to be in strict compliance with New York wage and hour laws.”
Importantly, the dissent focused on the fact that the sole individual who controlled the corporation was also the sole shareholder of the defunct private company, suggesting that the courts would look to some indicia of “active” rather than “passive” ownership before “looking through” a holding corporation to impose liability on its individual members. Still, Pope is of limited predictive value in this area of law because the majority did not reach this issue and because the case was decided nearly four decades ago, in 1980.
Fortunately for shareholders, both the NYBCL and NYLLCL feature stringent notice requirements. Specifically, an employee must provide written notice to the shareholder or the member no later than 180 days after the employee’s termination of the employee’s intention to hold a shareholder or member personally liable for unpaid wages under these laws. However, if the employee demands and receives the opportunity to examine the corporation’s books and records (available only under the NYBCL) during that 180-day time frame, the notice may be made within 60 days of examination. In addition, the suit must be successfully brought first against the employer. Only if the execution of a judgment against the employer fails may the employee then sue the individual shareholder or member for liability. Even then, the second suit must be brought within 90 days of the failed execution.
Given the scarcity of precedent protecting individuals from exposure from these laws, private equity funds that utilize intermediate holding companies or have portfolio companies organized as corporations doing business in New York must take care to be in strict compliance with New York wage and hour laws. Businesses with questions about the potential risk of liability should contact their counsel to ensure compliance with all applicable wage and hour laws, including Section 630 of the NYBCL.