You Can Be on the Hook! Personal Liability for an Employee’s Paycheck

Even though the Gig-economy is growing, most Americans are still employed by businesses owned or controlled by others. It doesn’t matter if the business is a corporation, LLC, a limited partnership, or sole proprietor, the employer of record responsibility is the same. For the purposes of this article we’ll refer to all types of businesses as “companies.”

Companies present many advantages, especially the well-known concept of “limited liability.”  A limited liability company is a corporate structure whereby the members of the company are not personally liable for the company’s debts or liabilities. A company is legally separate from those who work for it. You might therefore believe that if a company neglects to pay all employee wages when due under federal and/or state law, the company’s officers, managers, supervisors, and shareholders will almost never be held personally liable to the company’s employees as a result. Your belief may be a false sense of security, and, in many cases, it may prove to be quite incorrect.1

Who is “The Employer”?

Let’s first look at the definition of “employer” as set forth in the federal Fair Labor Standards Act of 1938 (“FLSA”). Under the FLSA, an “employer” is “any person acting directly or indirectly in the interest of an employer in relation to an employee.”2 In determining an employer’s status, “economic reality” prevails over technical common law, and there may be several simultaneous employers.

Whether this is so, as far as the law is concerned, does not depend on who pays the employee or signs the employee’s paycheck but rather on the “economic reality” of the employee’s job. The “economic realities test” refers to a method that determines the nature of a business transaction by examining the totality of the commercial circumstances. Courts use this test to determine if a person is an employee or an independent contractor. It is also known as the “common law agency test” or “common law hybrid test.”The potential personal liability of officers, managers, supervisors, and shareholders of a corporate employer, in addition to that of the employer, is not a hypothetical situation.

The federal Fair Labor Standards Act (FLSA) also allows for corporate agents and certain employees to be held personally liable for minimum wage, overtime pay, and other labor violations. Federal courts will apply an “economic realities” test, which requires the individual to exercise significant control over the company’s operations. To make this determination, courts consider whether the individuals have the power to hire and fire employees, determine salaries, are responsible for maintaining employment records, and control other significant aspects of the company’s day-to-day functions.

What is personal liability?

Personal liability means that legal damages are collected from the individual’s personal bank account, retirement fund, and/or sale of personal property (car, home, collectibles, etc.). Though there has always been some degree of personal liability in employment situations, the general rule was organizational liability. The employer paid; individuals did not. That’s changing.

Usually the employer is sued as an entity. In a growing number of cases, however, plaintiffs are naming the employer as well as the individual(s) accused of committing the violation. In these cases, the court may award damages against both the organization and the individual manager. In some cases, the plaintiff can elect to collect from either, or both.

Under ERISA, there is personal liability for breach of fiduciary duty.Anyone exercising discretion can be a fiduciary, including owners, directors, board members, HR staff, and office managers. Individuals, especially supervisors, are now frequent targets. Companies should warn and train their supervisors to avoid such liability.

Alleged, “sue your boss” lawsprovide real reasons for managers to ensure the employing company is following and compliant with all the relevant minimum wage, overtime, and other salary and benefit laws. Those who implement wage and hour policies should seek training regarding the complex maze of wage and hour regulations. Companies should promote a workplace environment that focuses on compliance with employment law, which includes policy development and management training. ClearPath stays up to date on all employment compliance so you don’t have to. This includes Paid Sick Leave and Minimum Wages. Over the last several years, many states, cities, and counties have passed and put into law Paid Sick Leave ordinances. While this is a great benefit for the employee, it is making it harder and more complicated to be an employer. To assist with this, ClearPath has created a free Cheat Sheet outlining the current Paid Sick Leave ordinances. This Paid Sick Leave Cheat Sheet was created because ClearPath pays close attention to this detail on behalf of our client companies. Additionally, states and cities around the country are passing their own minimum wage laws requiring that minimum wages be above the federal level of $7.50. Employers need to ensure they are following the appropriate ordinances to be compliant. Semi-annually, ClearPath updates its Minimum Wage Cheat Sheet so you can stay current.

If you don’t want to be on the hook and would like some assistance in employment compliance, work with a leader in the industry for outsourced Human Resources and Payroll functions associated with W-2 contingent workers. Get the benefits of hiring contingent workers without the potential risks. Let ClearPath be the path to your peace of mind.


1Can You Be Liable for an Employee’s Paycheck? Surprisingly, Yes!