Subtitle: The President or CEO of an Underfunded Corporation or LLC Is in a Unique Position to Face Double Financial Disaster
Last week's decision from the Massachusetts SJC provides guidance on how investors and board members can reduce their exposure for Wage Act claims. See Segal v. Genitrix, LLC, Slip Op. (Mass. SJC, Dec. 28, 2017). Because I litigate these same issues,1 I found the 37-page decision to be a good read. Most business people won't have the time or the interest, but the decision can be found here: https://law.justia.com/cases/massachusetts/supreme-court/2017/sjc-12291.html. Although not reported in the decision itself, the SJC overturned a judgment of over $1.75 million for Segal, the former President of Genitrix, LLC, against two former board members and investors.
As most employers now know, the Wage Act provides strong protection to Massachusetts employees. There are virtually no defenses. If wages are not paid to a Massachusetts employee, liability attaches. Once suit is filed, the company will be found liable for triple damages, attorneys' fees, interest and costs. Smart businesses and lawyers settle wage claims quickly unless there is a particular defense or factual dispute. Wages include hourly pay, salary, vacation pay, and commissions that are due and determinable.
Many of the cases that are now litigated and appealed involve personal liability under the Wage Act. A Massachusetts Corporation must designate a president and treasurer. Those individual officers are considered agents of the corporation who have the management of the corporation. They are liable under the Wage Act by the express text of the statute. The statute provides as follows:
“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.”
In recent years, the SJC has ruled that the term “corporation” also includes Limited Liability Companies. Left somewhat unclear, at least until last week, was whether and under what circumstances investors (including LLC Members and stockholders) and directors could be found personally liable as “officers or agents having the management of such corporation.” The ruling in the Segal v. Genitrix, LLC case is largely favorable to investors and directors.
This post is too short to get into all the nuances of Segal v. Genitrix, LLC and its antecedents. Briefly, the SJC reasoned that the Wage Act “does not impose personal liability on board members, acting only in their capacity as board members, or investors engaged in ordinary investment activities.” Id. at p. 2. The Court went through a long and well-reasoned analysis to conclude that “to impose such liability, the statute requires that the defendants be 'officers or agents having the management' of a company.” Id. Normally, they are not agents and normally they do not have the management of the corporation. There must be particular facts to support both conditions in order for personal liability to attach (which facts were not present in the Segal v. Genitrix, LLC case).
Anyone involved in an LLC or corporation or other entity should be concerned about potential personal liability. We now have a clear picture of ways to do that. Careful crafting of LLC Operating Agreements, corporate shareholder agreements, and other corporate documents are a crucial starting point. An investor and/or director who is not named as an officer and is willing to give up a certain level and type of control can virtually eliminate personal liability under the Wage Act.
The other lesson to glean from this line of cases is the subject of the subtitle of this post. Be wary of being named president or treasurer or manager of an LLC or corporation. Sophisticated investors may be setting you up to be the scapegoat if the business entity is underfunded and cannot pay its employees. As set forth above, Segal was the President of the Company. He apparently will not recover his unpaid wages. He was the President. The buck stopped with him. But it could have been even worse. He could have been stuck with the exposure of triple damages and attorneys' for other unpaid employees on top of not being paid himself (the decision indicates that one other employee was paid after threatening a Wage Act claim).
While most people will not feel sorry for the President or CEO of a corporation or the Managers or other executive officers of an LLC, these individuals are in a uniquely precarious position. When a company is struggling, they may be the last to be paid, as Segal was. Once the company is penniless, there may be no viable targets for a lawsuit by the executive officer. The executive officer may then face insult and further injury on top of injury. He or she may be left personally liable for not just the unpaid wages of others, but triple that amount plus the reasonable attorneys' fees of the other employees. Plus costs and 12 % interest on the base amount for good measure. That might be your reward for working for free and trying to keep the company afloat through tough times.
If you are contemplating running a business as a President, CEO or Manager, etc. and you are not the majority investor, protect yourself with the proper agreements. If you are already the captain of a sinking ship where employees are not getting paid, consult with a qualified attorney immediately to see how you can protect yourself as much as possible.
By Adam P. Whitney 617.338.7000
1I obtained a settlement for a corporate executive of $255,000 in a Wage Act claim against several members of an LLC Board of Managers and a judgment of over $640,000 against another Board Member who served as the de facto CEO (subject to appeal).