On the Hook: Business Owners could be Personally Liable for Employees’ Unpaid Wages

Michael NearyMichael Neary

Employee wages must be the number one debt obligation your business pays on time, no matter the financial burdens your business faces. If your business cannot pay wages, rightsize your workforce immediately – or else you personally could be on the hook for the wages.

A recent Maryland Court of Special Appeals case demonstrates yet again why that is the case. While most business entities limit the possibility of personal liability, the Fair Labor Standards Act, the Maryland Wage and Hour Law, and the Maryland Wage Payment and Collection Act allow for personal liability. In Lin v. Cruz, the Maryland intermediate appellate court again found all three of these wage laws can hold individuals liable for the wages owed by a business under the economic realities test.

The Economic Realities Test

In Lin, a group of employees sued a restaurant and six individuals seeking to recover unpaid wages. The trial court found one individual liable for close to $400,000 in wages and enhanced damages. On appeal, the Lin court affirmed the trial court by applying the economic realities test.

The economic realities test asks whether the individual the plaintiff seeks to hold liable “(1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.” The economic realities standard can easily extend individual liability past the owners of a business depending on the level of authority the individual had over the employee seeking wages. The ability of plaintiffs’ attorneys to stretch wage statutes to attach liability outside the core ownership group is bolstered by the view expressed in Lin that wage laws should be given an “expansive interpretation” to achieve the “broad remedial purposes” of those laws.

Because of cases like Lin, employees seeking to recover unpaid wages increasingly name individuals as defendants. Plaintiffs filing wage lawsuits can recover the unpaid wage, enhanced damages (up to four times the wage owed in one local jurisdiction), and attorneys’ fees. The enhanced damages increases the exposure for any individual named in a wage lawsuit. Since the economic realities test is fact specific, most individuals named as defendants will find it difficult having the claims dismissed on a motion to dismiss. Accordingly, the individuals could be stuck in the lawsuit through discovery and ultimately, depending on the facts, could be held liable for the damages awarded.

Prioritize Wages No Matter What

Because of the high stakes to the company and individuals in the management group from wage lawsuits, businesses should ensure employees are timely and properly paid for all hours worked no matter how tight the company finances become.

For more information, contact Michael at 301-657-0740 or mjneary@lerchearly.com.