New York Expands Shareholder Liability For Unpaid Wages
Last year, the Legislature amended the Wage Theft Prevention Act to add a provision to the New York Limited Liability Company Law, imposing personal liability on the members of a limited liability company having the ten largest ownership interests for the failure of the company to pay the wages of its employees. You can read more about that amendment here. The liability imposed by that amendment was similar to a provision already contained in the Business Corporation Law, which imposes personal liability on the ten largest shareholders of a corporation (other than a publicly-traded corporation) for the unpaid wages of employees of the corporation.
On November 20, 2015, Governor Cuomo signed an amendment to the Business Corporation Law [Chapter 421 of the Laws of 2015], which extends the reach of this provision to foreign corporations, when the unpaid services were performed within New York.
The amendment has been criticized because “it might turn business away from New York.” However, this criticism may be overblown. That’s due, in part, to the fact that shareholder liability under this provision is not automatic. Before an employee can charge a shareholder for unpaid wages, the employee must first provide written notice to the shareholder, within 180 days after termination, advising the shareholder that he or she intends to hold the shareholder liable under this provision. The employee cannot commence an action against the shareholder until after the return of an execution unsatisfied against the corporation upon a judgment obtained for the unpaid wages. Once an execution is returned unsatisfied, the employee then must commence his or her action within ninety days. As long as the company has sufficient assets to cover the amount of any unpaid wages, the shareholders aren’t likely to be concerned about this possible liability.
Also, depending on the amount owed, it may not be cost effective for the employee to hire an attorney to prosecute these two lawsuits–even with the prospect of attorney’s fees and liquidated damages that are both recoverable under Article 6 of the Labor Law. But, a word of caution. Even though lawsuits under this provision of the Business Corporation Law are rare, our office has successfully prosecuted such a claim on behalf of a former employee of a company that suddenly went out of business without first paying all wages that were due.
The sponsor’s memorandum of support highlights the primary reason for this amendment, which was to eliminate discrimination against New York corporations in favor of foreign (out of state) corporations insofar as liability for unpaid wages is concerned:
It should be noted that this Legislature recently recognized the problem revealed during the recent economic collapse in which unscrupulous businesses opened and closed without paying wages due their employees. The Legislature increased the penalty for failure to pay wages to 100% of the wages owed. However, the penalty is meaningless if the employee lacks an effective remedy for recovering his or her unpaid wages. The amendment strengthens existing remedies.
The amendment will be effective on January 19, 2016.
If you would like to schedule a consultation to talk about how this legislation may impact your business, please feel free to contact Peter Weishaar at firstname.lastname@example.org or (585) 512-3542. Peter also writes a law blog, the Rochester Law Review, covering legal developments, cases of interest, and events happening in all of the key areas of his practice. You can follow the blog on Facebook and Twitter. This article originally appeared on his blog, and it has been revised and reprinted with permission.
Peter's employment practice includes the representation of businesses and individuals in matters involving restrictive covenants, non-compete agreements, discrimination and failure to pay wages in State and Federal Courts, and before administrative agencies, including the New York State Division of Human Rights and the United States Equal Employment Opportunity Commission.
This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.