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Personal Liability For A Company’s Unpaid Wages

You read that right — an individual can be personally liable for a company’s failure to pay wages it was legally obligated to pay to its employees. Depending on the circumstances, the person liable could be the company’s owner, a manager, or another individual with operational control who is directly responsible for the employing company’s failure to pay statutorily required wages.

Such a person is treated as an “employer,” the same as the company, under the Fair Labor Standards Act (FLSA). The FLSA is the federal law that requires covered employers to pay a minimum wage to employees and to pay overtime pay to nonexempt workers. The individual is jointly and severally liable for the payment of wages, meaning the individual is fully responsible for payment, the same as the company.

As most people realize, the law requires an employer to pay employees for overtime at one and one-half times the employee’s regular rate, unless the employee or employer qualifies under an exemption. Overtime under the FLSA is time worked over 40 hours in any given workweek. There can be misunderstandings, second-guessing and disputes about whether an employee qualifies as exempt or not.

Because of the potential for personal liability for any unpaid wage claim, the individuals in a company who are responsible for how workers are paid, worker pay structures, and whether they are paid overtime should be sure the company is in compliance with the law. This is especially the case if the company is a recent start-up, thinly capitalized, or otherwise might not be around to pay all of the wages that workers may later claim they were owed. Regardless of whether the company is still in business or not, aggrieved workers may file suit against any company officer or other individual who was responsible for the company paying wages in compliance with the law. Under the FLSA, a lawsuit by one or more employees may be filed for wages going back for two years, or up to three years if the employer’s failure to pay is deemed “willful.”

Claims for unpaid wages can arise in various ways. Often, claims arise if an employer pays an employee a fixed salary, assuming that the employee is exempt from overtime pay, but the employee’s primary duties do not qualify for exemption. Even if an employee’s duties qualify for exemption, fluctuations in pay based on hours worked may make the exemption inapplicable. Claims can also arise if an employee is paid by job or by day via a pay structure that, though meant to cover anticipated overtime, fails to comply with regulations for how to pay for overtime.

Claims may arise if employees had to work through lunch without recording it as work time, or if they were unaware that certain tasks count as time worked, or if the employer discouraged overtime but under the circumstances could have made inquiry or otherwise realized that unrecorded overtime was being incurred. Time spent by an employee after business hours responding to emails from a smart phone, for example, can count as work time, and the employer cannot simply turn a blind eye towards it. A worker who was misclassified as an “independent contractor” may claim he should have been classified as an employee and paid a minimum wage and/or overtime. Claims can be made by one or more employees, or in collective action lawsuits brought on behalf of similarly situated employees who may consent to have their rights decided in the case.

An employer might assume that no claim can be made if the employee has signed a contract or waiver, or if the employee’s time records all indicate 40 or fewer hours worked in any workweek. But waivers are not enforceable in wage claims. If the employee in fact has worked more hours than the time records show, and the employer knew or should have known that the employee’s work could have taken more than 40 hours in a workweek, the employee can still make a claim, years after the fact. The nonexempt employee only needs to allege facts that can show overtime hours worked without compensation, the amount and extent of the work (which may be approximated), and that the employer knew (or should have known) of the uncompensated overtime.

For application of the FLSA under federal law, the claimant must also show the employer was engaged in interstate commerce. This requirement is met if the employer has been engaged in commerce and the annual gross volume of sales made or business done is not less than $500,000.

A small business that is not covered by the FLSA may be covered by similar provisions of Colorado state law requiring the payment of minimum wages and overtime. The Colorado law does not provide for individual liability of officers and agents acting in a representative capacity for the employing company. However, if an owner used the employing company as an “alter ego,” commingled personal and company assets (such as using the company bank account to pay personal debts), diverted assets, or if the company was undercapitalized (not originally funded with enough money to sustain it to pay debts), the employee may be able to “pierce the corporate veil” and hold the owner personally liable for the company’s debts.

Both the federal and state statutes have provisions for the recovery of attorney fees incurred to recover unpaid wages. Under the Colorado law, the employer may be liable for the unpaid wages and for a penalty to a former employee if the wages are not timely paid after a written demand. Under the FLSA, the employer can be liable not only for the underpayment of wages, but also for “liquidated damages” in an equal amount.

If the employer can establish that its conduct was both in good faith and based on a reasonable belief that its conduct was not in violation of the FLSA, the court may, in its discretion, award less or no liquidated damages. However, it ordinarily is not a sufficient excuse if the employer was operating off of erroneous assumptions, from ignorance, or by only partially complying with regulations or advice.

As the saying goes, an ounce of prevention is worth a pound of cure. Individuals who have operational control of a company’s pay structures and any payment for overtime would do well to assure compliance with wage and hour laws. They may avoid costly legal claims that could be made against the company and possibly against themselves.

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