In late June 2013, the Massachusetts Supreme Judicial Court ("SJC") and the Massachusetts Appeals Court (the "Appeals Court") issued two decisions broadly expanding the breadth of the Massachusetts Wage Act (the "Wage Act") by (i) increasing the types of entities and individuals subject to penalties for violations of the Act and (ii) extending the protections of the Act to out-of-state employees of Massachusetts-based employers, even where those employees did not primarily perform their duties within the commonwealth's borders.
Limited Liability Company Managers May Face Individual Liability for Violations of the Massachusetts Wage Act
Since at least the 1930s, Massachusetts law has been well-defined. Under the Massachusetts Wage Act, a corporation's "president and treasurer . . . and any officers or agents having the management of such corporation" ("Managing Agents") have personal liability for wages that a corporation fails to pay to its employees. Beginning in 2008, the corporation's failure to pay wages when they were due exposed the corporation, and its Managing Agents, to the risk of not only having to pay the unpaid wages, but also, as a penalty, treble damages to the unpaid employees.
This risk of personal liability and enhanced damages has long been an important consideration for sophisticated corporations and their professional advisors. Particularly when a corporation has encountered financial difficulties, the statutory obligations to employees under the Massachusetts Wage Act, the potential for personal liability of the Managing Agents and the risk of treble damages have been key factors to consider—not just for the troubled corporation, but for its lenders and creditors, as well.
But what about a limited liability company ("LLC")? Unlike corporations, LLCs do not have shareholders. Instead, owners of an LLC are members, not shareholders, and hold membership interests, and not stock, in the LLC. Unlike a corporation, an LLC is not required to have a president or treasurer. Instead, an LLC is managed by a "managing member" or "manager."
The Massachusetts Wage Act is silent on whether managing members of an LLC have personal liability akin to the liability of a corporation's Managing Agents. Does the form of the enterprise matter, such that a corporation's Managing Agents have personal liability for unpaid wages, but an LLC's managing member has no such personal liability? Is an LLC sufficiently similar to a corporation that the courts should impose liability on an LLC's managing member? The existing case law on this vital subject has been vague at best and conflicting at worst.
On June 13, 2013, in Cook v. Patient Edu, LLC, the SJC put these questions to rest. The SJC took an expansive reading of (and arguably rewrote) the Massachusetts Wage Act, and held that a manager of an LLC who "controls, directs, and participates to a substantial degree in formulating and determining the financial policy of a business entity" may have personal liability under the Wage Act. This ruling clarifies a previously ambiguous area of Massachusetts law, and likely will inform negotiations among a troubled LLC, its managing members and their creditors. Creditors of financially troubled LLCs will likely come under greater pressure to make concessions necessary to ensure employees are paid timely and in full to avoid the adverse consequences of personal liability of potential treble damages arising from failure or delay in paying employees in full.
The facts of this case are all too familiar to businesses encountering cash-flow problems, such as startups and other emerging businesses. Mr. Cook filed an action for unpaid wages under the Massachusetts Wage Act and sought treble damages against (i) Cook's employer, Patient Edu, LLC, a Massachusetts limited liability company; and (ii) two managers of the LLC. The LLC managers successfully moved to dismiss the claim in the Superior Court, arguing that managers of an LLC were not individually liable under the Wage Act because the individual liability provision of the statute applied only to those employed by corporations, and not by LLCs. "The president and treasurer of a corporation and any officers or agents having the management of such corporation shall be deemed to be the employers of the employees of the corporation within the meaning of this section." G.L. c. 149, § 148 (emphasis supplied). (It is important to note that when the provision of G.L. c. 149, § 148, making corporate officers individually liable for payment of wages, was added in 1932, the LLC did not exist as a form of business association.)
The SJC indicated that it was interpreting the language of the Wage Act "according to the intent of the Legislature," which was to protect wage earners. It opined that "[i]f a liberal, even if not literally exact, interpretation of certain words is necessary to accomplish the purpose indicated by the words as a whole, such interpretation is to be adopted rather than one which will defeat that purpose." To that end, the SJC worked around the literal language of the individual liability section of the Act applying to "corporations," and analyzed the beginning clause of the Act, which states that "[e]very person having employees in his service shall pay" (emphasis supplied) those employees their wages either weekly or biweekly (or on a less frequent basis in certain circumstances). The SJC held that because a manager or other officer or agent of an LLC, limited liability partnership or other limited liability business entity may be a "person having employees in his service," that person may be civilly or criminally liable for Wage Act violations if he "controls, directs, and participates to a substantial degree in formulating and determining policy" of the business entity.
There are at least three key takeaways from the Cook opinion for employers and legal counsel:
- Those advocating a narrow interpretation of Cook are likely to focus on the actual holding, which narrowly imposes liability only on LLC managers who "control[ ], direct[ ], and participate[ ] to a substantial degree in formulating and determining the financial policy" of the LLC. It may be challenging in larger entities to identify precisely which manager "controls, directs and participates to a substantial degree" both "in formulating and determining" the LLC's financial policies. The restrictive limiters (only managers who control, direct and participate to a substantial degree) may mean, as a practical matter, that very few individuals have meaningful risk of personal liability where an LLC fails to pay employees timely and in full.
- Those advocating a broad interpretation of Cook are likely to focus on two aspects of the opinion. First, notwithstanding that the Massachusetts Wage Act nowhere mentions LLCs, the SJC nevertheless ignored the plain meaning of the statute and instead relied on the perceived legislative intent (more on this below) to extend the statute's imposition to certain managers of an LLC. Second, the SJC's broad interpretation of the Massachusetts Wage Act appears to suggest that it applies to hold individuals liable where individuals involved in other business entities [such as limited liability partnerships ("LLP"), joint ventures, business trusts and loan participations and syndications, to name a few] also have personal liability for unpaid wages. The SJC's careful wording—that one who "controls, directs, and participates to a substantial degree in formulating and determining the financial policy of a business entity—by its terms is not limited solely to managers of LLCs. Further case law will develop the breadth and limitations of the SJC's words.
- In rejecting a conclusion based upon the plain meaning of the Massachusetts Wage Act, the SJC pointedly rejected the method of statutory interpretation favored by the current members of the United States Supreme Court. That Court in recent times has emphasized, repeatedly and emphatically, that statutory interpretation that rejects the actual language of a statute in favor of the presumed legislative intent is erroneous. It will be fascinating to observe how the starkly differing approaches of the SJC (which generally has the final say in the interpretation of Massachusetts statutes) and the United States Supreme Court will play out when a Massachusetts statute becomes the subject of a Supreme Court case.
Therefore, like their corporation counterparts, managers and members of limited liability business entities should ensure that all employee wages (to include commissions that are due and payable and vacation pay) are paid according to the time lines set forth in the Wage Act. Failure to do so may result in individual liability for mandatory triple damages under the Wage Act. This cautionary reminder applies equally to managers of limited liability business entities contemplating insolvency issues, including bankruptcy. LLC managers and officers of other limited liability business entities who control, direct and participate to a substantial degree in formulating and determining policy of the business entity will remain liable for Wage Act violations even after the employer files for bankruptcy.
Another Recent Appeals Court Ruling
Although the Wage Act is silent on the issue of whether it applies to out-of-state employees, the Appeals Court holds that the Act applies to out-of-state employees of Massachusetts employers where Massachusetts had the most significant relationship to the employee's employment.
On June 19, 2013, the Appeals Court added another layer of complication for Massachusetts employers striving to be compliant with the Wage Act. In Dow v. Casale, the Appeals Court, using a multifactorial choice-of-law analysis, held that a mobile salesperson who resided in Florida was entitled to the protections of the Wage Act.
The Appeals Court's choice-of-law analysis was quite fact-specific and relied on the following factors:
- The employer was a corporation with a sole place of business in Massachusetts.
- The chief executive officer, also named individually in the claim, was a Massachusetts resident.
- The customers which the sales employee acquired entered into business with the employer/corporation in Massachusetts.
- The employee's business cards identified the employer/corporation's Massachusetts contact information as that of the employee.
- Paychecks were issued from Massachusetts.
- The employee came to Massachusetts on business multiple times each year.
- The employer communicated with the employee from Massachusetts via email and telephone.
- The employment agreement between the employee and employer provided that it was governed by and interpreted under the law of Massachusetts.
Accordingly, Massachusetts employers should be aware that the protections of the Wage Act may, depending on the circumstances, protect employees working outside of Massachusetts. As such, employment practices related to such employees should be reviewed prudently to ensure compliance with Massachusetts law.