Five Things That Create Personal Liability for Officers and Directors of Corporations in MassachusettsPrint PDF
Entrepreneurs and early stage investors in startups understand that they are trying to defy the odds and to build great companies from mere ideas. For many of them, the risks of execution are at least balanced by a relatively easy to understand downside – the failure of the company and the loss of time, investment capital, and opportunity cost. Unfortunately, for officers and directors of Massachusetts based ventures, the failure of the company is not their only risk. Rather, they may face personal liability for a variety of employee compensation and benefit matters that arise precisely when their company is beginning to run out of cash. Here are five things entrepreneurs and investors who are officers and/or directors should consider as they struggle with balancing cash management and compliance:
1. Failure to timely pay wages. The president and treasurer of a corporation, and any other officers or agents “having the management” of the corporation are deemed to be the “employer” of the corporation’s employees for purposes of the Massachusetts Weekly Payment of Wage statute, M.G.L. c. 149, § 148. This statute requires employers to pay “wages” on a weekly or bi-weekly basis, or semi-monthly or monthly for certain salaried employees. Wages include accrued but unused vacation pay and commissions. Employees who are involuntarily terminated must be paid all earned wages on the day of discharge; employees who separate from service for any other reason must be paid wages on the first regular payday on or following their separation date.
Personal liability under this law is not limited to the value of the unpaid wages. To the contrary, employees who successfully sue their “employer” for unpaid wages under the statute are entitled to recover treble damages (that is, three times the value of the unpaid wages), as well as attorneys’ fees. There can even be additional criminal penalties including prison sentences and fines, though they are relatively rare.
2. Minimum Wage and Overtime. Massachusetts has laws requiring employers to pay overtime and minimum wages that parallel the federal overtime and minimum wage laws, though the Massachusetts minimum wage is usually higher than the federal rate (the federal rate is currently $7.25/hr; Massachusetts is $8.00). In addition, Massachusetts law provides for the recovery of treble damages and legal fees for employees who sue their employers for unpaid minimum wage or overtime. Massachusetts law also imposes liability on the managing officers and agents of any corporation for such failure to pay minimum wage or overtime.
Directors and officers of startups often unknowingly violate these provisions in connection with interns, believing incorrectly that there is no minimum wage obligation. Both federal and state law require that companies pay interns at least the minimum wage unless the intern meets certain requirements which are usually tied to for-credit educational programs. Even where interns are placed in training type programs, exemptions from the minimum wage requirements are rare and may be viewed with a court’s 20-20 hindsight about the true purposes of using unpaid labor.
3. Workers’ Compensation. A Massachusetts employer who fails to provide for workers’ compensation insurance as required by Chapter 152 of the Massachusetts General Laws is subject to civil penalties as well as a fine of up to $1,500 and/or imprisonment for up to one year. Both a corporation’s president and its treasurer may be liable for this punishment.
4. Tax Liabilities.
- Massachusetts. Chapter 62B of the Massachusetts General Laws requires employers to withhold a tax upon wages and pay the tax to the Commonwealth. Any employer with a duty to withhold or pay a sum to the Commonwealth who fails to do so will be held personally liable. The term “employer” includes an officer or employee of a corporation, or a member or employee of a partnership, who is under a duty to withhold and pay over taxes. An individual is under such a duty when he or she is “responsible” for paying the tax as a requirement of his or her job.
- Federal. An employer is required to (i) withhold federal income and FICA taxes (i.e., the so-called “trust fund taxes”) from employee compensation, and (ii) pay these amounts, as well as the FUTA taxes and the employer’s share of FICA taxes (i.e., the “non-trust fund taxes”), to the IRS. If the employer fails to deposit these employment taxes, the employer will be subject to a penalty of up to 15% of the underpayment. Furthermore, if the person “responsible” for the collection and payment of such taxes willfully fails to pay over withheld trust fund taxes, he or she will be personally liable for a penalty equal to 100% of the delinquent trust fund taxes. There may also be criminal penalties assessed for failure to collect or pay over the tax.
5. ERISA Liability.
ERISA is the federal law that governs employee benefit plans, including health insurance and 401(k) plans. As a general matter, officers and directors of a corporation can’t be held personally liable under ERISA in their capacities as officers and directors. However, an officer or director may be held personally liable in an action under ERISA for plan benefits if he or she has discretionary authority or responsibility for the administration of the plan.
The threat of personal liability for officers and directors of startups is very real. Massachusetts courts have seen an increase in the number of cases where early-stage employees (including terminated co-founders) have successfully sued the officers and directors for unpaid wages for work performed when the business could not make payroll. These employees invariably seek treble damages and lawyers’ fees whenever permitted. Additionally, while directors and officers in Massachusetts can use “employment practices” type insurance (as part of their Directors & Officers Liability coverage) to limit personal exposure, these policies are often subject to sublimits and restrictions that cannot fully protect the insured.
Therefore, if you are building an early stage Massachusetts business, or if as part of an investment you plan to become a director of one, you should simultaneously keep your eyes on two critical things when balancing the economic and personal upside rewards of entrepreneurship: the downside of possible business failure, and the personal liability that may result if financial resources are inadequate to compensation the human capital utilized. In short, as an officer or director of a Massachusetts corporation, you should not hire or accept work from any employee or intern unless you properly withhold taxes and unless each of them is fully and timely paid at least the minimum wage.
This advisory was prepared by Jeremy Halpern, a member of the Emerging Companies practice group, and David S. Rubin, a member of the Labor, Employment and Benefits practice group at Nutter McClennen & Fish LLP. For more information, please contact Jeremy, David, or your Nutter attorney at 617.439.2000.
This advisory is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.