Boucher v. Shaw: Imposing Personal Liability on Corporate Agents for FLSA Claims

The Ninth Circuit U.S Court of Appeals has held that personal liability for unpaid wages and overtime compensation under Fair Labor Standards Act (FLSA) can be imposed upon individual corporate managers who exercise control over the employment relationship, even though the corporation has filed for bankruptcy protection. In Boucher v. Shaw, 572 F.3d 1087 (9th Cir. 2009), the Court found that the individual managers could be “employers” under the FLSA definition, and therefore any manager who falls under the definition could be liable to employees for minimum wage and/or overtime wages in addition to an equal amount in liquidated damages. The Court determined that the corporation’s bankruptcy filing did not remove the managers’ FLSA liability because the managers were not parties to the bankruptcy proceeding, the employees’ wage claims were not directed at any assets in the bankruptcy, and the managers’ liability was therefore independent of the bankruptcy proceeding.

BACKGROUND

The Castaways Hotel, Casino and Bowling Center in Nevada filed for Chapter 11 bankruptcy protection on June 26, 2003. On February 10, 2004, after the discharge, the case was converted to a Chapter 7 liquidation and the casino ceased operations.

Three former employees, discharged in January 2004 while the casino was operating as debtor-in-possession, brought suit against three individual officers of the casino, seeking to recover unpaid wages. One plaintiff claimed that she was not paid for the last pay period she worked at the casino. All plaintiffs claimed that they had not been paid for accrued vacation and holiday time. The defendants were: 1) the Chairman/CEO/ 70% owner of the company, 2) the officer responsible for handling labor and employment matters who owned 30% of the company, and 3) the CFO of the company with no ownership interest in the corporation.

All plaintiffs asserted claims under Chapter 608 of the Nevada Revised Statutes and the Fair Labor Standards Act (FLSA), 29 U.S.C. section 206(a). The plaintiffs originally filed suit in Nevada state court, but the defendants removed the case to the federal district court in Nevada, which dismissed all claims on the basis that the individual defendants were not “employers” under either Nevada state law or the FLSA. On appeal, the Ninth Circuit certified the question of individual manager liability for the state wage claims to the Nevada Supreme Court, which confirmed that the managers could not be found liable under Nevada law.

The only remaining question for the Ninth Circuit, then, was whether the individual managers could be held liable on the federal FLSA claims.

Individual Managers Can be Personally Liable for FLSA Claims

Under the FLSA, every “employer” must pay a minimum wage and any “employer” that violates the FLSA is liable to the employee for minimum wage and/or overtime wages, plus an equal amount in liquidated damages. 29 U.S.C. sections 206(a) and 216(b).  The FLSA defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee…” 29 U.S. C. section 203(d). Moreover, where the manager exercises “control over the nature and structure of the employment relationship” or “economic control” over the relationship, that person is an “employer” under the FLSA and is subject to liability.

The Ninth Circuit placed particular emphasis on the “economic reality” of the employer-employee relationship to find that the individual defendants could be held personally liable for the FLSA claims, including the fact that two of the defendants held ownership interests in the casino. Boucher v. Shaw, 572 F.3d 1087, 1091 (9th Cir. 2009). The Court noted that the FLSA definition “’is to be given an expansive interpretation in order to effectuate the FLSA’s broad remedial purposes.’” Boucher at 1090 (citing Lambert v. Ackerly, 180 F.3d 997, 1011-12 (9th Cir. 1999)).

In reaching its decision, the Court heavily relied upon its previous decision in Lambert, which held a CEO and COO of a corporation personally liable as “employers” under the FLSA’s anti-retaliation clause. (See Boucher, at 1091). In Lambert, the Ninth Circuit upheld the jury instruction given at trial, stating that the jury: “could find the [CEO and COO]… liable only if it determined that they had a ‘significant ownership interest with operational control of significant aspect of the corporation’s day-to-day functions; the power to hire and fire employees; the power to determine salaries; the responsibility to maintain employment records.” Lambert, 180 F.3d at 1012.

Even though one of the Boucher defendants did not have a “significant ownership interest” in the corporation, the Ninth Circuit still found that all defendants were “employers” under the FLSA, in light of the “circumstances of the whole activity” and “economic reality” of the relationship. Boucher, at 1091.

The Corporation’s Bankruptcy Did Not Remove the Managers’ Liability

Notably, the Boucher defendants did not actually challenge the plaintiffs’ contention that they qualified as “employers” under the FLSA. Rather, they argued that any duty they may have had to pay wages was removed by the company’s bankruptcy filing, but the Ninth Circuit disagreed. Id.

The Court found that the employees’ claims were not directed at any assets in the bankruptcy; instead, the claims were based on the individual liability of the managers. Accordingly, the issue of FLSA liability of the individual managers, who were not parties to the bankruptcy proceeding, was completely independent of the bankruptcy proceeding. Id. at 1093-1094 (Citing Chung v. New Silver Palace, 246 F. Supp. 2d 220, 226 (S.D.N.Y. 2002) (stating that the automatic stay for the corporate debtor does not protect directors and officers from liability under the FLSA in suits for unpaid wages brought against them as co-defendants), and Donovan v. Agnew, 712 F.2d 1509, 1511, 1514 (1st Cir. 1983) (finding that the “overwhelming weight of authority” is that managers with operational control of a bankrupt corporation can be jointly and severally liable with the corporation for unpaid wages under the FLSA).

CONCLUSION

Whether or not directors and officers of corporations can be held personally liable for unpaid wages under state laws and regulations varies widely from state to state. Like Nevada, California and several other states have found that individual officers and managers cannot be held personally liable for wages owed to employees. See, e.g., Reynolds v. Bement, 36 Cal. 4th 1075 (Cal. 2005).  On the other hand, other states, including New York, Washington, and Illinois, have held managers, directors, and officers personally liable – New York even imposes criminal penalties for wage violations.

Boucher adopts the broader definition of “employer” – one that includes any manager with control over the employment relationship – to hold individual managers liable for wage claims brought under the FLSA. Boucher is even broader in scope than its predecessor, Lambert, which appeared to at least require that the liable manager have an ownership interest in the company. Under Boucher, even those managers without corporate ownership rights may be held liable if they fit the FLSA definition. Note that the Ninth Circuit is not the first federal circuit to extend personal liability for FLSA claims to individual corporate officers or directors. See, e.g. Chao v. Hotel Oasis Inc., 493 F.3d 26 (1st Cir. 2007) (finding personal liability against president of corporation who had control over the employment relationships and terms);  U.S. Dept. of Labor v. Cole Enters, Inc., 62 F.3d 775, 778-79 (6th Cir. 1995) (holding the president/ 50% owner personally liable as an “employer” under the FLSA).

Boucher should be a deeply disconcerting opinion for corporate officers, directors, and managers, especially those involved with companies facing financial distress and possible insolvency. The benefit of limited liability is a key reason so many companies elect a corporate legal structure, but Boucher makes it clear that the limited corporate protections are not absolute. As a result of Boucher, more managers will be individually named as defendants in unpaid wage cases, and more of those cases will include FLSA claims alongside state law claims, especially if brought in a state that does not hold managers personally liable under state law.

But the impact of Boucher can be avoided if company executives and managers take proactive measures. First, it’s important for any corporation to review its pay practices to ensure compliance with state and federal laws and regulations. Companies should make sure that all managers are trained on wage-and-hour laws to help minimize compliance problems.

Second, individual managers can insulate themselves from the risk of liability through the corporate structure. The less economic or material control a manager has over the employment relationships, the lower the chance of personal liability. 

Third, if your company is facing a liquidity crisis or is headed toward insolvency, managers need to take a more aggressive approach toward payroll in order to avoid personal liability. Payroll needs should be a priority – a company should strive to meet payroll, both before and during bankruptcy. The company should immediately terminate all workers that it cannot afford to continue paying.

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Jeremy J. Gray

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