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Massachusetts Supreme Judicial Court Rules on Liability of Directors and Investors For Wages to Corporate Employees

Posted on Jan 10th, 2018

Ryan S. Carroll
January 10, 2018

A constant concern for board members and investors is the personal liability to which they might be exposed as a result of their typically limited roles with a company. Thanks to a recent ruling by Massachusetts’ highest court, board members and investors of companies can take some comfort that liability for wages pursuant to the Massachusetts Wage Act, M.G.L. c. 149, § 148 (Wage Act) will not apply in most cases.

In Andrew Segal vs. Genitrix, LLC, the Massachusetts Supreme Judicial Court held that two former board members and investors in Genitrix, LLC (Genitrix) were not personally liable under the Wage Act for failing to pay wages owed to the former president of the Company, Andrew Segal (Segal). The Court concluded that, “…the Wage Act does not impose personal liability on board members, acting only in their capacity as board members, or investors engaged in ordinary investment activity.” It further concluded that, “… to impose such liability, the statute requires that the defendants be ‘officers or agents having the management’ of a company.” Additionally, defendants who were former board members had limited agency authority and management of the company as they were not also designated as company officers.

The scenario in the Genitrix case, while apparently being a case of first impression in terms of the law, is actually quite common in the startup world. Genitrix was a life-sciences startup that raised several rounds of angel financing, pursuant to which the investors had rights to sit on the Board and to approve various major corporate actions. As the Company’s cash position depleted and the business did not take off as planned, it was unable to raise additional funds. At that time, Segal, the Company’s founder, president and key employee, took it upon himself to defer his own compensation and implement other cost-cutting measures. Because the investors had approval rights over these matters, these matters were approved, or at least made known, to the Board. To keep the Company in business, the investors also put in additional emergency capital which included specific terms on how the funds would be applied, among other conditions. Segal later argued that these approval rights amounted to the directors and investors becoming “agents having management of [the] corporation,” which the Court rejected.

A brief summary of the Wage Act as the Court applied it to board members and investors in the Genitrix case is as follows:
1) employers are required to compensate employees for earned wages;
2) an employer may be sued directly if it does not pay employees for earned wages;
3) an “employer” is a business or person having employees in its, his or her service;
4) in corporations, “employers” are, by definition, the president, treasurer, and any officer or agents having the management of the corporation (in addition to the corporation itself)
5) the Wage Act does not include board members or investors as “employers” to the extent their roles are limited to those of what a board member or investor would typically do in order to safeguard their investments or participate in board meetings; and
6) if personal liability is to be imposed on individuals who are board directors or investors, it will not be imposed by virtue of their holding those roles, but they must be also be (i) the president, (ii) the treasurer, or (iii) officers or agents having assumed and accepted individual responsibility for the management of the company.

In concluding against a finding of agency, the Court reasoned that a Board acts collectively and not individually; accordingly, the actions of a director are not of an agent, but “as one of the group which supervises the activities of the corporation.” Similarly, an investor’s exercise of its rights is separate and distinct from serving as an agent. Exercising those rights and, in particular, the “leverage as an investor over infusions of new money” are separate and distinct from being an agent having the management of the company. While the documents in this case did provide the investors with some, albeit very limited, powers regarding Segal’s employment agreement (which included the Company’s rights under that agreement to fire Segal for cause and to select his successor), the Court held that this limited authority would not amount to “agency” as required for liability to apply under the Wage Act.

It is also important to note that Genitrix was a Delaware limited liability company headquartered in Boston, and not a Massachusetts limited liability company. While the Massachusetts corporate laws generally would not be applicable to corporate directors and officers for a Delaware entity – which would be governed by Delaware law under what is known as the “internal affairs doctrine” – the Wage Act applies to any employer in the Commonwealth regardless of where it is formally organized.

While this ruling is a win for board members and investors, it does not mean that they cannot be found liable pursuant to the Wage Act. This case illustrates how important it is for board members and investors to only become officers of a company if necessary and to limit their agency authority and exposure to management of the company in the language contained in their company documents.

We recommend having experienced corporate or employment counsel analyze each situation to ensure that board members and investors are not agreeing to written documents overstating their level of management or agency authority, and that investors and board members consult with such counsel to understand the limitations of their roles that are necessary to avoid the risk of personal liability.


Massachusetts Appeals Court Holds that Mass Wage Act Applies to Remote Employees

Posted on Jun 21st, 2013

A Massachusetts Appeals Court ruled today that an employee’s private right of action under the Massachusetts Wage Act under G.L. c. 149, § 148 did apply in the case of a traveling salesman who rarely set foot in the Commonwealth of Massachusetts. This choice of law case basically states that where the Commonwealth has a close connection to the employment relationship of the parties, local law should be applied to the claim.

In this case the plaintiff worked as a salesperson Starbak, Inc., a Delaware corporation that had its a sole place of business in Massachusetts. He resided in Florida and conducted most of his sales activity across the country for Starbal. When Starbak closed its doors, it terminated his employment with significant commissions outstanding. The plaintiff then brought suit against the company’s chief executive officer, a Massachusetts resident, seeking unpaid sales commissions of more than $100,000, certain unreimbursed expenses, wages in lieu of accrued vacation time, treble damages, and attorney’s fees. The question here was whether Massachusetts law would apply given that the plaintiff rarely visited the state.

The Court found that the nature of the plaintiff’s work was such that only Massachusetts was tied to it. The employment agreement governing the work relationship provided that Massachusetts law would be applied in the event of a dispute. Starbak was located there and as a result customers who dealt with the plaintiff entered into business with the company in Massachusetts. The plaintiff’s business cards identified his contact information as the same as Starbak’s, based in Massachusetts. His paychecks were issued from Massachusetts, and he communicated with the company daily. The plaintiff was in fact required to return to Massachusetts several times each year, and when he did return he would generally work in the same office space each time.

While distinguishing a case cited by the defendant where the Wage Act was not applied to an Australian employee operating outside the United States, importantly, the Court did acknowledge that the application of the Wage Act may be different in the case on a non-US employee.

This case should caution businesses that employ workers from a distance. While it does not seem to indicate that all remote employees will always be able to access remedies afforded by the local law of the businesses they work for, this is certainly something for businesses to consider when drafting employment agreements and establishing relationships with remote workers.

If you have any questions about this topic, please feel free to email us.


Managers of LLCs Can Be Individually Liable for Unpaid Wages

Posted on Jun 14th, 2013

 

The Massachusetts Supreme Judicial Court recently held that managers of LLCs can be held liable individually for unpaid wages under the Massachusetts Wage Act. Specifically, a “manager who ‘controls, directs, and participates to a substantial degree in formulating and determining’ the financial policy of a business entity may be a ‘person having employees in his service’ under G.L. c. 149, § 148, and thus may be subject to liability for violations of the Wage Act,” [citations omitted].

The issue before the court was whether the legislative intent was to include managers of LLCs in the group of possible violators of the Massachusetts Wage Act, and the court found that it did. The court found a clear legislative intent to hold all individuals who contribute to a business’ fiscal and employment policies responsible for how employees are treated.

What does this mean for day to day business? LLCs of all sizes now have one more thing to consider when taking out director and officer and employee practices liability insurance. Since these kinds of policies are crucial to risk management for any business and this case signals a new kind of risk, this case should be on your radar.

If you have any questions about this topic, please feel free to email us.