New Washington Case Law
By Darren Feider
Washington is known for having among the country’s strongest protections ensuring the payment of wages. When a company becomes insolvent, former employees will seek payment of their earned wages from the former company managers and owners. Despite the common belief that the filing of Chapter 7 bankruptcy discharges all corporate obligations, Washington courts have held officers, vice principals, and agents of a former corporation responsible for the payment of former employees’ earned wages after bankruptcy.
Under Washington law, an individual is liable for unpaid wages only if he or she (1) is an officer, vice principal, or agent who controls the payment of wages, and (2) willfully withholds the employee’s wages. Personal liability can exist if the payment of wages, payday, is scheduled after the filing of the Chapter 7 bankruptcy. Further, personal liability can exist even if the bankruptcy court discharges the company’s liability.
Although generally, board members are not personally responsible for the business decisions made by a company, Washington courts have expanded liability to board members who exercise control over the day-to-day business operations. Thus, board members can now be personally liable for unpaid wages even if the company files bankruptcy.
In Allen v. Dameron, the Washington Supreme Court recently held that a board member can be liable for unpaid wages even if his or her employment with the company and his or her ability to control payment decisions was terminated by the filing of a Chapter 7 bankruptcy. The Allen court also held that board members’ participation in the decision to file Chapter 7 bankruptcy established willful withholding of wages.
In Allen, a company experienced severe financial problems and was unable to obtain financing. The board members decided to cease operations, terminate all the employees, pay any outstanding creditor obligations, and then file bankruptcy. The board, however, retained the CFO to assist with the shutdown. The company did not have sufficient funds to cover all wages, including those of the CFO. After the company filed bankruptcy and had its debts and obligations discharged, the CFO sued two board members contending that they are personally liable for his unpaid compensation.
The board members argued that they were not “officers, vice principals, or agents.” Although the Allen court agreed that normally board members are not personally liable for unpaid wages, the court found that the board members were liable because they became de facto officers of the company. The court relied on the facts that the board members operated the company, made financial decisions, and handled the day-to-day business decision-making.
The Allen court also rejected the argument that once bankruptcy was filed, no board member could be personally liable because all the company’s obligations were discharged in bankruptcy. The court held that employees must receive all wages owed to them and a board member is not relieved of his or her responsibility simply because the pay date for the wages occurred after the Chapter 7 filing. The Allen court agreed that Washington law specifically gives employees the right to assert a claim against the bankruptcy trustee. Despite the fact that the employees have a claim against the bankruptcy trustee, and that a claim against the trustee is preferred, the court held that an employee’s claim against the board members still exists.
The board members also argued that they were exempt from personal liability because they lacked control over the decision to pay wages. The Allen court conceded that low-level managers and supervisors, who do not have control over the payment of wages, do not have personal liability. However, officers who control the financial decisions of the company including the decision to file bankruptcy, do have personal liability.
In order to hold an officer, vice principal, or agent personally responsible, the individual must have willfully withheld the employee’s wages. Personal liability is imposed on officers when the officers’ willful financial decisions impact the payment of wages. Such decisions include, deciding whether to pay one debt over another, whether to file bankruptcy, close the business, or continue to run an inadequately capitalized corporation.
The only two instances in which an employer’s failure to pay wages will not be considered willful are if there is a finding of carelessness or if a bona dispute exists. Carelessness is a bookkeeping error or something else that is accidental in nature. A bona fide dispute exists where there is a debatable dispute over whether the employment relationship exists or wages must be paid. Financial inability is not a bona fide dispute.
In Allen, because the directors chose to retain the CFO, file bankruptcy, and pay the company’s insurance cost before they paid employee wages in full, they were held liable.
The takeaways from the Allen v. Dameron case are that employee wages should always be paid first. They should never come after payment of operating costs, insurance costs, vendor costs, or any other obligation. If they are not paid, Washington courts will hold the decision makers liable. The best advice is to terminate the employees before they incur wages that the company cannot pay.
Article originally posted on LinkedIn.com.