Managers Can be Sued by Employees for Unpaid Wages Even Though Company is in Bankruptcy

By Samson R. Elsbernd

Obligations of “Employers” under the FLSA Under the federal Fair Labor Standards Act (FLSA), employers must pay a minimum wage to their employees. Employers who violate this requirement may be held liable not only for the unpaid wages, but also for an equal amount of liquidated damages. In a recent federal case, former employees of a bankrupt company sued the company’s managers for unpaid wages. The court decided that the managers could be sued for unpaid wages even though the company had filed for bankruptcy. Boucher v. Shaw (2009) 2009 DJDAR 11827.

The Facts of Boucher v. Shaw

Nevada employees were fired, and alleged they were still owed wages. The employees sued three managers: the Chairman and CEO of the company, who owned 70 percent of the company; the manager responsible for handling labor and employment matters, who owned 30 percent of the company; and the CFO, who did not have an ownership interest in the company. The plaintiffs brought suit under the FLSA. The court noted that the definition of “employer” under the FLSA is to be given an expansive interpretation in order to effectuate the FLSA’s broad remedial purposes. Thus, where an individual exercises control over the nature and structure of the employment relationship or economic control over the relationship, that individual is an employer within the meaning of the FLSA and is subject to liability. The court concluded that, because each of the individual defendants was alleged to have had control of the plaintiffs, their employment and their place of employment, the case could proceed against them. It is important to note that the court did not find that the individual managers were liable for the unpaid wages; only that the case against them could proceed. It would ultimately be up to the trier of fact, after hearing all the evidence, to determine whether the individual managers were employers and, thus, liable for the wages of the employees.

The Company’s Bankruptcy does not Bar the Employee’s Claims

The managers argued that their duty to pay unpaid wages ended when their company entered Chapter 7 liquidation. Normally, the debtor in bankruptcy proceedings has an automatic stay, which means that any actions filed after the bankruptcy may not proceed. The court in Boucher noted that the automatic stay only protects the debtor, his property and his estate. There, the company was the debtor, not the individual managers. Accordingly, the company’s automatic stay did not affect the mangers’ liability. As a result, neither the managers nor their property were protected by the company’s bankruptcy proceedings, and the managers faced personal liability for unpaid employee wages.

Why Federal Court?

As most California employers know, California employees typically bring employment cases in state, rather than federal, court. In general, California law is much more employee friendly than federal law. Manager liability for unpaid wages, however, is one of the very few instances where federal law is actually more favorable to employees than state law. The California Supreme Court has determined that officers, managers, and directors cannot be held personally liable for a corporation’s failure to pay its employees under California law. Reynolds v. Bement (2005) 36 Cal. 4th 1075, 1076.

Lessons from Boucher

Boucher is a reminder that employers must comply with both state and federal wage and hour laws. Whichever law provides greater protection for the employee will be applied. Until now, lawsuits brought under the FLSA have been extremely rare in California. Expect to see a rise in lawsuits brought under the FLSA as more companies declare bankruptcy and more employees seek their unpaid wages from upper managers.