Managers Individually Liable for Unpaid Wages Despite Employer's Bankruptcy
A recent case should strike fear into the hearts of all upper-level managers and human resources professionals: in Boucher v. Shaw, the Ninth Circuit ruled that individual managers were liable for their subordinates' unpaid wages, even though the employer company filed for bankruptcy.
In Boucher, a group of former casino employees sued the CEO, CFO and the labor relations manager of their former employer, the Castaways Hotel, Casino and Bowling Center. The three managers moved to dismiss, arguing that they were not "employers" that could be liable for unpaid wages under the Fair Labor Standards Act (FLSA), and that they should receive protections from the Castaways' bankruptcy filing.
The Ninth Circuit noted that under the FLSA, the term "employer" is to be construed broadly to include individuals who have “control over the nature and structure of the employment relationship,” or “economic control” over that relationship. It concluded that the three executives, two of whom were also alleged to be co-owners of the casino, fit that definition of "employer." The court also found that because the three executives were not parties to the bankruptcy proceeding, they were not entitled to any bankruptcy protections.
As the World of Work reported earlier this month, the Washington Supreme Court reached a similar ruling based on almost identical facts in Morgan v. Kingen. These cases should serve as a reminder to managers everywhere: if your business is failing, you may want to prioritize paying your employees' wages over everything else. Failure to do so may lead to personal liability.
Washington Supreme Court Decides Morgan v. Kingen - Bankruptcy is No Defense
The Washington Supreme Court issued a decision today in Morgan v. Kingen, holding that bankruptcy is not a valid defense to a willful withholding of wages under RCW 49.52.070. The plaintiffs in this case worked at Funsters Grand Casino in SeaTac, Washington. The casino was not a success and the owners voluntarily filed for Chapter 11 bankruptcy after only one year in business. After it became clear that the owners were not going to inject badly needed capital, the bankruptcy court converted the proceedings to a complete liquidation under Chapter 7. After the conversion, the owners couldn't have paid their employees even if they had wanted to (at least from the seized Funster assets).
The plaintiffs brought a class action lawsuit on behalf of over 180 employees to recover unpaid wages. The owners of the bankrupt casino argued that while the wages were admittedly owed, the withholding was not willful because the assets were seized in bankruptcy. This distinction is crucially important because willful withholding of wages allows a plaintiff to recover double damages, attorneys' fees and exposes the withholder to personal liability. The owners of the bankrupt casino were thus personally liable for twice the amount of all the unpaid wages plus attorneys' fees unless they could assert a bankruptcy defense. They tried. They failed at the trial level, the appellate level, and as of today, at the Washington Supreme Court as well. Justice Sanders dissented, noting that the owners could not have paid as their assets were seized and unavailable. He was joined by Justice Johnson and Justice Sweeney, pro tem.
The bottom line for businesses in Washington remains unchanged by this decision. A financial inability to pay wages does not constitute a defense to a willful withholding of wages. Today's decision establishes that even a complete liquidation in bankruptcy is no defense. The lesson? If your business is failing and it looks like there may not be enough assets to satisfy all the looming creditors, you might want to seriously consider paying wages before anything else.
