In the last days of 2017, the Massachusetts Supreme Judicial Court (“SJC”) gave board members and investors of corporations and LLCs some cause for celebration. In Segal v. Genitrix, LLC, SJC-12291 (Mass. Dec. 28, 2017), the Court held that board members and investors cannot be held personally liable for their company’s violations of the Massachusetts Wage Act, G.L. c. 149, § 148, except in limited circumstances such as when they have acted as an agent for the company with management responsibility for the company’s finances or payroll.
Massachusetts has taken a hard line on employer violations of the Wage Act. An employer that fails to comply with the Wage Act is subject to triple damages plus attorney’s fees and costs if a worker prevails in a law suit for the nonpayment of wages. The Wage Act also imposes personal liability for a violation of the Wage Act on the company’s president and treasurer “and any officers or agents having the management of” the company.
The Wage Act’s personal liability provision is a strong incentive for individuals who manage companies to comply with the Wage Act. The question for the SJC was to whom, and how far, this personal liability could extend. In other words, could board members and investors be considered “agents having the management of” a company?
What Happened In The Case?
Andrew Segal, the plaintiff, was the president, CEO, and the sole officer of a biotech start-up company called Genitrix, LLC. H. Fisk Johnson, III, one of the defendants, provided the initial funding for the start-up and continued to invest in the company through his venture capital firm. Stephen Rose, the other defendant, was a member of Genitrix’s Board and managed Johnson’s venture capital firm.
As president and CEO, Segal had sole responsibility for all day-to-day operations of Genitrix, which included, among other activities, supervision of the facilities, fundraising, the company’s finances, and control of the company’s payroll. In 2006, Segal, realizing Genitrix was running out of funds to pay its employees, told its Board that the company would need to lay off at-will employees to avoid liability under the Wage Act. Johnson invested additional funds, which Rose earmarked for payroll and other specific purposes. Unfortunately, Genitrix’s financial condition did not improve. At the start of 2007, Segal stopped taking his salary (but did not inform the Board until months later). A further investment was made to pay Genetrix’s one remaining employee, but by mid-2007 the company could not afford even to pay him, and he was terminated. Out of money and employees, Genitrix ultimately dissolved in 2009.
Segal filed suit against Johnson and Rose under the Wage Act for unpaid wages from 2007 to 2009. The jury found both liable under the Wage Act as “agents having management of” Genitrix. An appeal followed, and the SJC agreed to hear the case on direct appellate review.
In its decision, the SJC reversed the verdict for Segal. Hewing closely to the Wage Act’s language, the SJC concluded that board members and investors may only be subject to personal liability if they are officers or agents that have management responsibility for the company, because it is the assumption and acceptance of individual responsibility for the management of the corporation that justifies imposing personal liability for Wage Act violations. The parties agreed that Segal was Genitrix’s only officer, and so Johnson and Rose only could be liable for the Wage Act violation if they were agents that had management responsibility for Genitrix. The SJC held that they were not.
Why Does The Case Matter?
This case required the SJC to apply the definition of “agents having management of the” company to board members and investors. Answering the question required the SJC to determine first whether board members and investors are agents of a company, and second, if they are agents, what does it mean to have “management of” the company.
On the question of agency, the SJC determined that when board members and investors are acting within their roles as board members and investors, then they are not agents of the company. Board members are not agents, because they act only as a collective body that supervises the activities of the company. Investors may exercise some control over the companies in which they invest, but when they act, it is individually, and not as an agent of that company. The SJC cautioned that while board members and investors may not be considered agents by their positions alone, a board member or investor may be empowered to act as an agent for a company.
On the question of management, the SJC determined that the management responsibility must be “similar to those performed by a corporate president or treasurer, particularly in regard to the control of finances or payment of wages.” The SJC recognized that even though board members are required by statute to exercise management oversight responsibility as part of a board, this responsibility is insufficient to meet the individual management responsibility required by the Wage Act.
What Should Board Members and Investors Do?
Wage Act claims pose significant financial risks to individuals and companies facing such claims. Board members and investors of companies can and should rest a bit easier now that the SJC has set such high hurdles for employees who bring these claims against them; however, the SJC did not bar these claims entirely. Board members and investors should consider carefully the risk of personal liability before taking on additional responsibilities to act on behalf of their companies or assume management responsibility for the company’s finances.
If you have any questions about the Massachusetts Wage Act, serving as a board member for a company, or investing in a company, contact one of Conn Kavanaugh’s experienced employment or corporate lawyers.