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Corporate Officers Not Personally Liable For “Unpaid Wages” Due To Surprise Company Shut-down


The Federal Worker Adjustment and Retraining Notification Act, U.S.C. §§ 2101-2109 (the “WARN Act”), allows employees to sue employers who fail to provide them with 60 days’ advance notice of the company’s shutdown or “mass” layoffs, which are specifically defined in the law. The 60-day notice period is intended to provide employees transition time to adjust to the prospective loss of employment. The WARN Act applies to companies with 100 or more employees.

Judgments pursuant to the WARN act, consisting of damages in the form of back pay and employee benefits covering each day of the notice violation, can amount to millions of dollars. However, a company’s officers are not individually liable for judgments against the company. Of course, plaintiffs would like to have recourse against officers when a company is insolvent or is otherwise incapable of satisfying its creditors. Until recently, it seemed that one such recourse might be the Massachusetts Wage Act, M.G. L. c. 149, § 148 (the “Wage Act”), which imposes personal liability on corporate officers for a company’s failure to pay earned wages.  The Wage Act is a particularly harsh statute because it mandates payment of triple the unpaid wages plus payment of the plaintiffs’ attorney’s fees.

This case arose from financial troubles experienced by ISIS Parenting, Inc. (“ISIS”). In January 2014, the officers of ISIS abruptly shut down the company and notified all 200 employees that their employment had terminated effective immediately.  The announcement stunned the employees and clients of ISIS. Click here and here to learn more about the failure of ISIS.  Because ISIS provided no advance warning of the shutdown, the former employees obtained a $2 Million judgment against the company under the WARN Act. Because the company was insolvent, it did not even try to defend the WARN Act lawsuit.

After obtaining no relief in the WARN Act case, the group of ISIS former employees tried a different approach and filed suit against the former corporate officers if ISIS under the Wage Act.  In the case of Jillian Calixto, et al. v. Heather Coughlin, et al., plaintiffs sought to have their $2 Million judgment, awarded in a prior lawsuit under the WARN Act, deemed wrongfully withheld “earned wages” under the Wage Act. If successful, the plaintiffs would be able to hold the company’s officers personally liable for 3 times the unpaid wages plus payment of their attorneys’ fees. The officers moved to dismiss the plaintiff’s case.  The trial court granted the motion to dismiss, and the plaintiffs appealed.

The Massachusetts Supreme Judicial Court (“SJC”), the highest-level appeals court in the Commonwealth, dismissed plaintiffs’ complaint and held that WARN Act damages do not constitute “earned wages” under the Wage Act. The Court based its decision on the meaning of “earned wages,” which it defined to be wages that an employee had “secured by virtue of work or service actually performed,” and which, according to the SJC, did not encompass WARN Act damages, which are damages for failing to provide sufficient notice of a mass layoff or company closing. In other words, WARN Act damages do not cover actual work performed by employees; rather, it covers the post-termination period when employees were subjected to a surprise layoff and therefore not working. The Court also noted that characterizing WARN Act damages as “back pay” did not alter its analysis, because back pay normally compensates plaintiffs for wages that they would have earned if they had continued working.

As a result of the SJC’s holding, corporate officers in Massachusetts can take comfort in knowing that they cannot be held personally liable for their failure to provide the 60-day required notice under the WARN Act. This means that, in cases of exigency, companies may shut down without fear of their senior executives being held liable for the unpaid wages that would have been paid during the 60-day WARN Act notice period.

This case also presents important reminders for employers:

  • remember to seek help from legal counsel if considering a large-scale layoff or company shut-down — the WARN Act is complex, and sometimes layoffs as small as 50 employees can trigger liability;
  • employers must always remain cognizant of the Wage Act because it requires employers to pay employees their earned wages — don’t let employees work and then fail to pay them;
  • the Wage Act has strict requirements for when to pay a terminated worker — workers who resign can be paid in the next regular payroll, but involuntary terminations require payment on the day of termination, including pay for accrued but unused vacation time.
Image credit:  by geralt used under Pixabay License