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Company investors and board members off the hook for unpaid wages

Seyfarth Synopsis: In an important decision, the Massachusetts Supreme Judicial Court clarified the scope of personal liability for unpaid wages under the Massachusetts Wage Act.  The SJC held that board members and directors of a company generally cannot be held personally liable for unpaid wages, unless they take on significant management duties of the company. 

On December 28, 2017, the Massachusetts Supreme Judicial Court clarified the scope of individual liability under the Massachusetts Wage Act (Massachusetts General Laws Ch. 149, §§ 148 and 150). While the statute specifies that the president and treasurer of a corporation may be liable for unpaid wages, “agents having the management” of a company may be liable, as well.  The SJC has now clarified exactly who those “agents” are not.  In Segal v. Genitrix, the SJC held that investors and board members, when acting solely in those capacities, do not fall within the purview of the Wage Act and may not be held personally liable for unpaid wages.

In Segal, the plaintiff Andrew Segal was the president and chief executive officer of Genitrix LLC, a biotechnology startup. Defendants H. Fisk Johnson, III and Stephen Rose were former board members and investors in the company. Under the terms of his employment agreement, Segal was responsible for conducting the company’s business and managing its finances, subject to the overall direction and authority of the board. Consistent with the terms of his agreement, Segal was responsible for all day-to-day operations and was the only person authorized to sign checks from the company’s bank accounts, including payroll checks for employees’ wages.

In 2006, Segal informed the board that the company was running out of money to pay its employees. Despite this, Rose limited further investments into the company, and those that were made were earmarked for specific purposes. In 2007, Segal stopped taking his salary so that he could continue paying the one remaining employee. Segal proposed a cost-cutting plan, but that proposal was not authorized by the board. By the middle of 2007, the company had run out of money, and the board was deadlocked.

In 2009, Segal sued Fisk and Rose in Massachusetts Superior Court for unpaid wages under the Massachusetts Wage Act. The case ultimately went to trial and the jury concluded that both Johnson and Rose were individually liable under the Wage Act.

On appeal, the Supreme Judicial Court held that Johnson and Rose could not be liable under the Wage Act. Because the parties agreed that neither Johnson nor Rose were officers of the company, they could only be liable if they were “agents having the management” of Genitrix. The Court found it significant that the statute does not include board directors or investors in its definition of employer. Further reviewing the statutory language and the legislative history, the Court determined that only individuals who have assumed significant management responsibilities over a corporation, in their individual capacities, similar to those performed by a president or treasurer, should be liable under the Wage Act.

The Court held that investors and board members are ordinarily not considered agents of a company. With respect to Johnson and Rose, because management powers, particularly over the payment of wages, were expressly delegated to Segal as president and CEO, the Court found that they had limited agency authority. Similarly, the Court explained that individual board members exercising normal corporate oversight, and acting collectively with other board members, do not have the management of the company. Segal argued that the board’s rejection of his cost-cutting plan established that Rose and Johnson had authority.  The Court disagreed, explaining that “corporate boards are regularly required to make difficult decisions that have an impact on the company’s finances.” The Court concluded that such decisions are not the acts of individual board members as agents and do not impose Wage Act liability. Segal also argued that Rose’s restrictions on additional investments constituted management of Genitrix.  Again, the Court disagreed, explaining that investors invariably exercise some control over the businesses in which they invest, including when the business seeks new funds. The Court concluded this is separate and distinct from having the management of the company.

Segal is significant because it limits the circumstances that corporate directors and investors can be on the hook for unpaid wages, particularly when the company itself is defunct. So long as investors and board members act solely in those capacities and do not take on the day-to-day management of the business, they should not be personally liable for the company’s failure to pay wages.

This article was written Robert A. Fisher and Molly C. Mooney and originally published by Seyfarth Shaw.

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