Personal Liability of Directors and Investors for Unpaid Wages

By: Andrew G. Lizotte

March 7, 2018

In a recent Radio Entrepreneurs podcast, we discussed the various circumstances under which principals of a company can be exposed to personal liability for the debts of that company, including potential liability for unpaid wages.  A recent decision of the Massachusetts Supreme Judicial Court provides some protection for directors of, and investors in, a company against such claims.

The Massachusetts statute on wage claim liability defines persons responsible for payment of a corporation’s wage liability as the “president and treasurer of [the] corporation and any officers or agents having the management of such corporation,” in addition to the corporation itself.  Other than the president and treasurer, the court found that the statute applied to impose personal liability upon those individuals with significant management responsibilities similar to a president or treasurer, particularly in regard to the control of finances or payment of wages of the company.

In the present case, it was the president himself suing certain directors and an investor for unpaid wages.  The court concluded that the directors and investor did not have personal liability, per se, for unpaid wages merely because they held these positions.  Rather, there would need to be express or implied delegation of an agency responsibility of management to warrant such liability.  The court concluded that any agency authority under the circumstances was insufficient to provide such individuals with “management of” the company.

As to the board members, collective board oversight of the company did not equate to management responsibility for individual board members.  More was required in order for such personal liability to attach.   As to the investor, his right to enforce provisions of the president’s employment contract, and his right to direct how money advances were expended, did not equate to management of the company. Investment restrictions limited to the use of new monies did not constitute management direction and control over existing resources. The court therefore concluded that personal liability did not extend to these groups for the unpaid wages.  This decision provides some additional protection to individuals when dealing with a financially distressed entity.

The case is Segal v. Genitrix, LLC (Mass. Dec. 28, 2017, No. SJC 12-291).