A wage exception to the principle of shareholder limited liability dates back over 200 years to the enactment of New York’s first general corporation law.  New York is one of the few states to impose such wage liability upon shareholders, and it does so regardless of the shareholder’s knowledge, control, or fault.

Specifically, § 630 of the Business Corporation Law makes the 10 largest shareholders of privately held domestic and foreign corporations personally liable, on a joint and several basis, for “all debts, wages or salaries” owing to “its laborers, servants or employees other than contractors, for services performed . . . .”   The term “wages” is broadly defined to include virtually all compensation and benefits, including vacation, severance, and employer contributions to insurance, welfare, pension and annuity plans.

The ten largest shareholders are determined by their beneficial interest as of the date on which the unpaid services began to be performed.  As noted above, liability is absolute, and applies even to a one percent shareholder who had no control over or knowledge of the unpaid wages, as long as he or she is among the ten largest shareholders.

The practical impact of the statute is somewhat minimized by the tight time limitations placed upon the unpaid employee, who generally has only 180 days after termination to provide notice of intent to sue the shareholders, and 90 days to institute suit after return of an unsatisfied judgment execution against the former employer.  The requirement of an unsatisfied execution ensures that the only time such personal liability will be triggered is when the employer has become insolvent or otherwise ceases to exist.

In 2014, New York imposed the same personal, joint and several liability upon the ten members with the largest percentage ownership interest in limited liability companies.  Section 609 of the Limited Liability Company Law parallels its corporate counterpart in most respects, except that foreign LLC’s are not affected, and § 609 does not limit its application to services performed in New York.  In short, it applies only to domestic LLC’s, and will apply even if the unpaid services are performed outside of New York.

The provisions of these two unique New York statutes are invoked frequently as more FLSA wage and hour claims are being filed.  Under the FLSA, corporate shareholders can be held personally liable for wage and hour violations if they exercised the requisite operational control, as defined in the case law.  But where proof on those factors is thin, plaintiffs can invoke § 630 or § 609 to assert liability against passive shareholders/members who have only an infinitesimal interest in the employer, as long as the total number of shareholders or members are 10 or less – a common occurrence in FLSA cases involving small closely held “mom & pop” type employers.

As noted above, while liability under § 609 and § 630 is typically triggered only when the employer becomes insolvent, it is common for “inability to pay” to become an issue in FLSA cases, where liability is doubled through liquidated damages and then increased further by interest and counsel fees.  The size of the potential judgment, especially in cases with multiple plaintiffs, can be crushing to an entity with limited assets. Given these facts, the careful plaintiff’s counsel in such wage and hour cases will provide the requisite 180 notice of intent to sue the employer’s shareholders or members if there is any doubt the eventual judgment will be collectable.  Failing to provide timely notice will waive the plaintiff employee’s ability to invoke these statutes if the employer later ceases to do business.

Joe DiBenedetto recently retired from Winston & Strawn LLP, after spending 46 years in its Manhattan office as a capital partner specializing in commercial litigation. He formed JDB Mediation LLC to further develop his mediation and arbitration practice, which is centered in Manhattan and its surrounding counties (including Westchester, Nassau, and Suffolk). Joe DiBenedetto’s experience, training, and other credentials are more fully described at www.JDBMediation.com