United States: A Personal Interest In Compliance

Last Updated: October 20 2014
Article by Stephen D. Erf

Officers, executives and managers have a very personal interest in assuring that compliance efforts with U.S. federal, state and local law are effective—depending on the issue in question, noncompliance may expose the individual to personal liability.  This potential for personal liability impacts all parties in a proposed sale transaction:  the buyer, the seller and their officers and agents who are, or will be, involved in the target business.  The following potential bases for liability are in addition to failing to observe corporate formalities, under the familiar doctrine of "piercing the corporate veil."  Coupled with the more expansive successorship liability available under U.S. labor and employment law, the potential personal liability for the employing entity's noncompliance can be surprising and significant.

Typically, the organization that employs the individual executive or manager will indemnify the individual for liability resulting from actions taken within the scope of the individual's duties that are in accordance with the company's policies and in its best interests, and it may have corresponding insurance coverage.  However, it is not uncommon for insurance coverage to be unavailable and, if the organization is financially unsound or contests the individual's eligibility for indemnification, the personal financial exposure can be significant.  Thus, it is incumbent on the individual to be aware of the areas in which there are potential personal exposure and exercise vigilance to maximize legal compliance by the organization.

Even where the organization has sufficient resources to defend a civil claim, the individual may face civil or other claims for several reasons.  Most significantly, there is a risk of criminal prosecution in certain circumstances.  For example, a California grand jury recently indicted an owner of a company and the company's project manager when a day laborer died after the collapse of an unsupported excavation wall.  The grand jury accused the individual defendants of manslaughter and willfully violating state occupational safety and health regulations.  If convicted, the individual defendants could receive up to a three-year prison sentence.  [People v. U.S. Sino Investment Inc., Cal. Super. Ct., No. 214054]  The employee's survivors also have filed a wrongful death claim against the company and its owner seeking $25 million.

The Fair Labor Standards Act (FLSA) definition of an "employer" includes "any person acting directly or indirectly in the interest of an employer in relation to an employee ... "  In Irizarry v. Catsimatidis, 722 F.3d 99 (2nd 2013), the U.S. Court of Appeals for the Second Circuit held that the owner of a New York City grocery chain is personally liable for $2 million of a $3.5 million settlement of a wage and hour class action after the chain claimed financial inability to satisfy the settlement.  Personal liability of the owner was appropriate because he had functional control over the enterprise as a whole and was heavily involved in its daily operations.

Such potential personal wage and hour liability is not limited to owners.  For example, in Jang v. Woo Lae Oak, Inc. Chicago (No. 12-cv-00782 Dec. 12, 2013), the plaintiffs sued under the FLSA and the Illinois Wage Payment and Collection Act, claiming that the restaurant and certain individuals, including a supervisor, failed to pay them minimum wage and overtime, required them to pay credit card processing fees for customer charges, and failed to make deductions and payments for Social Security, Illinois Employment Security, worker's compensation insurance and state and federal income taxes.  The supervisor, who had no ownership interest and was not an officer, denied that she had the type of authority required to render her liable as an employer, and moved to be dismissed from the lawsuit.  However, the district court denied the motion because under the "economic reality test" there were fact questions, including, among other things, whether she was responsible for hiring and firing workers and setting their schedules and whether she had a hand in overseeing the restaurant's financial transactions and accounting.

Sometimes a plaintiff sues an individual for lost wages because the plaintiff has no other means of recovery.  For example, the plaintiff may be faced with an employer that is judgment proof.  If the plaintiff sues the employing entity and the executive and/or managing individuals and the employing entity file for bankruptcy, the bankruptcy law provides for an automatic stay of the litigation against the employing entity.  However, the claims against the individual defendants are not automatically stayed and may be pursued by the plaintiffs in many situations.

Even if the employing entity possesses sufficient funds to defend a lawsuit and satisfy any judgment, sometimes the plaintiff joins individuals as defendants in order to put additional pressure on the entity to resolve the matter.  Such claims may impede the individuals' ability to secure a loan (such as financing for a real estate purchase) or require reporting the potential liability to comply with pre-existing loan covenants or for other reasons.  Additionally, such claims create the potential for adverse publicity.  In other words, the claims against the individuals, at the very, least present an irritant that may cause them to influence the entity to resolve the dispute.

Potential personal liability may exist beyond the area of wage and hour/wage payment statutes, and may depend on both federal and state and local laws.  On the one hand, the federal courts generally have held that there is no personal individual liability under certain federal civil rights statutes, including Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967 and the Americans with Disability Act.  However, many states provide for potential personal liability in their counterpart civil rights statutes, and the federal and state laws are not mutually exclusive.

Normally, there is no personal liability under the federal National Labor Relations Act, which protects the rights of non-supervisory employees to organize a union or engage in other protected, concerted activity, or under the federal Worker Adjustment and Retraining Notification Act, which requires notice of mass layoffs and plant closing, in certain circumstances.  Similarly, an individual normally does not have potential liability for compliance with worker's compensation laws or the contract between an employer and its employee (with some exceptions based on wage payment violations that the executive/manager knowingly permit).

However, an individual who is not an officer may be liable under the Family and Medical Leave Act (FMLA), where the individual controlled , at least in part, the plaintiff's ability to take FMLA leave and the restoration of the plaintiff to his or her former position on return from leave.  Similarly, the federal Uniformed Services Employment and Reemployment Rights Act defines an employer to include "any person, institution, organization, or other entity that pays salary or wages for work performed or that has control over employment opportunities."  (Emphasis added.)  Under the Internal Revenue Code, an individual may be responsible for an employer's failure to collect, account for and pay federal withholding taxes to the government, where the individual is a "responsible person" for collection and payment of the employer's taxes and he or she "willfully" fails to pay the taxes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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