December 04, 2019 | By Patrick T. McCloskey
Forming a corporation or limited liability company generally gives the founders protection against personal liability for the debts and obligations of the business. The primary exception to this protection is the so-called “piercing the corporate veil” doctrine, which could be invoked in situations where corporate formalities are not followed, or a business is undercapitalized. Notwithstanding this general rule, founders and other principal owners should be aware that even if grounds for piercing the corporate veil are lacking, they could still be held personally liable for unpaid wages.
Under Section 630(a) of the New York Business Corporation Law, the ten largest shareholders of a private corporation can be held personally liable for unpaid wages. In 2016 this provision was expanded so that it now applies both New York and foreign corporations, including the most popular jurisdiction of incorporation, Delaware.
A similar provision exists in Section 609(c) of the New York Limited Liability Company Law, with one significant difference–it only applies to New York LLCs. This may change soon, as legislation has been introduced, but not yet enacted, to amend this provision so that it will apply to both domestic and foreign LLCs.1
For purposes of the above provisions, the calculation of the top ten equity owners is measured as of the beginning of the period for which the services have been unpaid. Although each of the top ten owners is jointly and severally liable (meaning each can be held responsible for the entire amount), any top ten owner who pays more than his or her pro rata share has a right of contribution against the other top ten owners.
Unpaid employees need to comply with certain procedures in order to hold top ten owners personally liable under these provisions. Specifically, employee(s) must: (i) give notice to the top ten owner(s) within 180 days of their termination; (ii) obtain a judgment against the applicable corporation or LLC;2 and (iii) commence an action against the top ten owner(s) within 90 days of such judgment.
The above referenced laws are not the end of the analysis for potential personal liability of a corporate shareholder or LLC member for unpaid wages. Depending upon the circumstances, shareholders or members who are actively involved with the day-to-day activities of the company (i.e. hiring, firing, setting compensation etc.) could be deemed to be an “employer” under the New York Labor Law, which could trigger personal liability for unpaid wages.3
As set forth on the disclaimer page of this website, this post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).
1 See New York State Assembly Bill A453 (2019-2020 Legislative Session); New York State Senate Bill S2734 (2019-2020 Legislative Session).
2 A judgment against the corporation may be excused in bankruptcy situations or similar events where it would be futile. See Sasso v. Millbrook Enterprises, Inc. 108 Misc.2d 562 (Special Term, Nassau County 1981)
3 See Lauria v. Heffernan, 607 F. Supp.2d 403 (EDNY 2009).