In New York, small businesses open and close all the time. These small businesses provide opportunity for workers to gain employment and make a living. The problems begin when a small business is struggling and is about to fail. Unfortunately, the small business owner starts “cutting corners.” And one of the first places is to reduce the workers’ salary or stop paying them completely. A worker who is on the receiving end finds himself without wages for one or two weeks before he even finds out. Then, when confronted, the small business owner says that things are tough and he cannot pay the full salary and also says that he is on the verge of declaring bankruptcy. Moreover, the employer offers the employee to work for free for a few weeks until the business picks up again with a promise to repay everything once things improve.
In this situation, which occurs rather frequently, the employee works without pay or below minimum wage for weeks. The employee does not want to look for another job because he hopes that the business would pick up and he would eventually receive the money earned. At the same time, the employee knows that if he complaints or start legal proceedings against the small business, the owner would simply become insolvent and, as the employee is well aware, there is no money or assets to go after. In addition, the employee would effectively forego even the possibility of the promised payments.
The good news is that the employee may have a recourse in this situation. There are a couple of legal ways to go after the business owner personally.
First, the owner may be the “employer” New York State wage laws. In this case, the owner would under these wage laws, be liable for the wages to the employees. Unlike the Fair Labor Standards Act (the Federal minimum wage law) that applies to employers meeting certain criteria, under New York Labor Law, the employer is defined broadly as “any individual, partnership, association, corporation, limited liability company, business trust, legal representative, or any organized group of persons acting as employer.” N.Y. Lab. Law § 651(6). So in many cases, an individual owner may be found liable for unpaid wages as an employer.
Second, even if the first way is not applicable (or even if it is), N.Y. Business Corporate Law § 630 makes ten largest shareholders of a corporation personally liable for unpaid wages. This means that even if the corporation is insolvent, the owner may be personally liable. This is a significant exception to the general rule that shareholders are not responsible for the corporation’s debts. Certain requirements must be met however. Section 630 applies only to corporations and does not apply to limited liability companies. Furthermore, it applies only to New York corporations, so out-of-state corporations doing business in New York would not be subject to this seciton. Another requirement is the employee must put the owners on notice of his intent to hold them personally liable for the unpaid wages of the corporation. This notice must be given within 180 days of the employees termination.
The possibility of holding owners of a business to be personally liable for the unpaid wages of the business is a powerful tool against employers who take advantage of their employees.