Warning to Management: You May Be Individually Liable Under the FLSA

Fourth Quarter 2009Newsletters California UPDATE Employment Law

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Individual owners and managers of companies are not always protected from liability in wage and hour claims. In a recent case before the U.S. Court of Appeals for the Ninth Circuit, Boucher v. Shaw, a plaintiff sued three managers of his former employer, the Castaways Hotel, Casino and Bowling Center, for unpaid wages under the Fair Labor Standards Act (FLSA), among other claims.The defendants were the chairman and chief executive officer with a 70 percent ownership interest in the Castaways; the manager responsible for handling all labor and employment matters who had a 30 percent ownership interest; and the chief financial officer.

Although corporate agents and employees cannot be held individually liable for violations of California wage and hour laws, federal law provides a different avenue for redress. Such individuals may be liable under the FLSA if they exercise significant control over the company's operations. To make this determination, courts consider whether the managers have the power to hire and fire employees, the power to determine salaries, the responsibility to maintain employment records and other signs of operational control over significant aspects of the corporation's day-today functions. In this case, the court determined that each of the defendants exercised sufficient control over the Castaways to be individually liable for any violation of the FLSA.

The defendants did not contest liability under the FLSA and instead argued that they could not be liable for unpaid wages because the Castaways entered Chapter 7 liquidation and ceased operations after the plaintiff 's paycheck for the unpaid wages was due to be issued. The court disagreed, holding that the company's bankruptcy—whether under Chapter 7 or Chapter 11—does not affect the liability of its individual managers under the FLSA. However, the court noted that if the liability of the managers were to affect the property of the company in bankruptcy, such as by a requirement that the company indemnify the managers, it may be necessary for the plaintiff to proceed against the managers through bankruptcy proceedings.

Cases like Boucher provide a cautionary tale in these economic times. While not frequently cited, federal standards do apply to most California employers and provide plaintiffs with an alternative source of compensation. Employers should expect to see a rise in claims against individual owners who have the ability to pay the debts of their business. Consequently, owners and managers should be cautioned and should not assume that filing for bankruptcy removes their potential individual liability under federal law.