The Massachusetts Supreme Judicial Court recently held that individuals acting as board members and investors cannot be held personally liable under the Massachusetts Payment of Wages Law, M.G.L. c. 149, § 148, for a company’s failure to pay wages. Only board members or investors who also served as an officer or agent “having the management” of the company can be subjected to personal liability. This is a significant decision, given that the Payment of Wages Law carries substantial penalties for noncompliance.

Background

The facts of Segal v. Genitrix may sound familiar to anyone who has worked with or for a start-up company. The plaintiff and H. Fisk Johnson, III agreed to form a biotechnology company with plaintiff serving as president and Johnson providing the initial funding. Johnson funded the company through a venture fund that he co-owned with Stephen Rose. Both Rose and Johnson served on the Board of Directors.

A few years after the company's founding, the plaintiff informed the Board that the company was running out of funds to pay its employees. At that point, the venture fund agreed to contribute additional funds, but earmarked those funds for specific purposes. Nine months later, despite having laid off a number of employees, the company was struggling to meet its payroll obligations. At this point, the plaintiff voluntarily agreed to stop taking his salary. A few months later, the Board voted to lay off the company’s only other employee.

Plaintiff and the Board could not agree on whether to move forward with the business in some fashion or simply dissolve the company and sell its assets (primarily consisting of intellectual property). During this time, the plaintiff continued to work – without compensation – because he thought he would eventually get paid.

After the company was dissolved, the plaintiff filed a lawsuit under the Payment of Wages Law seeking to recover the value of his unpaid salary. If he prevailed, the statute would also entitle him to mandatory awards of treble damages and attorneys’ fees. Because the plaintiff knew that the company could not satisfy a judgment, he also brought claims against Johnson and Rose under the Payment of Wages Law. After the plaintiff prevailed at trial, Johnson and Rose appealed, arguing that, as mere board members and investors, they could not be liable for unpaid wages under the Payment of Wages Law.

The Court’s Decision

The Supreme Judicial Court reversed the judgment against Johnson and Rose, holding that the Payment of Wages Law does not impose personal liability on board members who acted only in their capacity as board members, or on investors who engaged only in ordinary investment activity.

The court reviewed the language of the Payment of Wages Law, noting that it provides liability only for an “employer.” The statute defines employer to include “the president and treasurer of [the] corporation and any officers or agents having the management of such corporation.” Because the law does not specifically include board members or investors within the definition of “employer,” board members and investors cannot be held liable unless they also served as the company’s president or treasurer or were an officer or agent “having the management of such corporation.” Because neither Johnson nor Rose was an officer of the company, the court focused its analysis on the issue of agency.

After reviewing traditional principles of agency law, the court held that to be liable, Johnson and Rose must have “assumed and accepted as individuals significant management responsibilities over the corporation similar to those performed by a corporate president or treasurer, particularly in regard to the control of finances or payment of wages.”

While the court noted that investors “may exercise significant financial control over a company through their power over their investments,” it concluded that such investors “are generally acting as outsiders, not managers or agents of the corporation.” The court found nothing in the parties’ relationship to suggest otherwise. In fact, the applicable limited liability company agreement expressly stated that investors did not have agency authority.

The court also concluded that the mere fact that this agreement gave Johnson the ability to terminate the plaintiff’s employment under certain circumstances did not transform him into an agent for purposes of the Payment of Wages Law. Accordingly, the court held that Johnson and Rose could not be held individually liable.

The decision provides some insight into when a board member or investor may be found liable under the statute. For example, a board member might be liable if he or she “had been empowered to act individually as the functional equivalent of the president or treasurer of the corporation.” In contrast, however, “[c]ollective board oversight and control over management, finances, and policy is not oversight and control by individual board members” that would give rise to individual liability.

Takeaways

While this decision is welcome news to the employer community, investors and board members should still proceed with caution if and when they are asked to step outside their traditional roles and assume a more active role in managing the company. It would also be prudent for a new company’s organizational documents to state expressly that investors and board members are not authorized to act as agents of the company. Both at the startup phase and whenever they encounter challenges with respect to paying employees, companies would be well-advised to work with experienced employment counsel when attempting to address these important and complex issues.