Director Liability Under the Massachusetts Wage Act: The Supreme Judicial Court Clarifies the Law but Traps May Remain for the Unwary

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by Mark D. Finsterwald

Case Focus

In Segal v. Genitrix, 478 Mass. 551 (2017), the Supreme Judicial Court (“SJC”) addressed whether members of a company’s board of directors may be personally liable under the Massachusetts Wage Act, G.L. c. 149, §§ 148, 150, for the company’s failure to pay wages to employees. In Segal, the SJC interpreted, for the first time, language in the Wage Act defining “employer” in the context of directors. The SJC held that the Wage Act does not impose liability on directors acting only in their capacity as directors. Even so, the Court did not fully insulate directors from Wage Act liability. There remains a possibility that directors could, perhaps unwittingly, become subject to personal liability in the event a company fails to pay wages.

The Wage Act

The Wage Act enables employees to sue employers who do not pay earned wages, with mandatory awards of treble damages and attorney’s fees for successful claims. Liability is not limited to the business entity, as the Wage Act defines “employer” to include “the president and treasurer of a corporation and any officers or agents having the management of such corporation.” This definition does not mention directors. Nor does it explain how to assess whether a person is an “agent[] having the management of such corporation.” G.L. c. 149, § 148.

Facts and Procedural History

Plaintiff Andrew Segal was the president of Genitrix, LLC, a biotechnology startup that he cofounded with defendant H. Fisk Johnson, III. Johnson was also an investor in Genitrix, and he appointed his representative, defendant Stephen Rose, to the company’s board of directors. Johnson funded Genitrix through a company called Fisk, which Johnson and Rose co-owned. Segal, as president, managed all of Genitrix’s day-to-day operations, including payroll.

In 2006, Genitrix began to have difficulty making payroll. Starting in 2007, Segal stopped taking salary to enable the company to meet its other financial commitments. Rose later declined to direct Fisk to invest enough money in Genitrix to pay Segal. In early 2009, Segal initiated Wage Act litigation against Johnson and Rose.

At trial, the judge instructed the jury that “a person qualifies as an ‘agent having the management of such corporation’ if he … controls, directs, and participates to a substantial degree in formulating and determining policy of the corporation or LLC.” The judge did not instruct the jury that the defendants needed to have been appointed as agents. Nor did the judge instruct the jury that defendants needed to have assumed responsibilities functionally equivalent to those of a president or treasurer. The jury found both defendants liable for Segal’s unpaid salary. Johnson and Rose moved for judgment notwithstanding the verdict, the trial court denied the motion, and Johnson and Rose appealed.

The SJC’s Analysis

At the outset, the Court stated that it viewed as significant the Legislature’s omission of directors from the Wage Act’s definition of “employer.” Segal, 478 Mass. at 558. Parsing the statutory language, the SJC dismissed the possibility that either defendant could be liable as president, treasurer, or any other officer, because neither of them held an office at Genitrix. Johnson and Rose could be liable only if they were “agents having the management” of the company. The Court explained that this language establishes “two important requirements: the defendant must both be an agent and have the management of the company.” Id. at 559. The Court differentiated between having some management responsibility and “having the management” of the company. “Having the management” means assuming responsibility similar to that performed by a corporation’s president or treasurer, the Court reasoned, “particularly in regard to the control of finances or payment of wages.”

As to agency, common law agency principles—set forth in the Restatement (Second) of Agency—counsel that directors are not typically considered agents. Restatement (Second) of Agency § 14C (1958). The SJC observed that “[a] board generally acts collectively, not individually.” Segal, 478 Mass. at 561. Such collective action does not confer individual agency authority on directors. Nevertheless, the Court explained that individual directors still could be “considered agents of the corporation if they are empowered to act as such, but any agency relationship stems from their appointment as an agent, not from their position as a director….” Id. at 563. An agency appointment could result from a board resolution, but also could “arise from either express or implied consent.” The Court gave as an example a scenario in which “a particular board member had been empowered to act individually as the functional equivalent of the president or treasurer of the corporation.” Genitrix, however, made no such appointment with respect to either defendant, instead delegating executive management authority (including dominion over wages) to Segal. Segal signed the checks, oversaw the payroll, and suspended the payment of his salary. Defendants had no such authority.

Moreover, just as a board’s collective authority over a corporation does not confer agency authority on an individual director, a board’s collective “oversight and control over management, finances, and policy is not oversight and control by individual board members.” Id. at 565. The Court noted that, since corporate statutes vest all management responsibility in a corporation’s board, if board members were to be considered agents and normal board oversight were considered “management,” then all directors would be personally liable under the Wage Act. That result would be inconsistent with the plain wording of the statute.

The Segal defendants’ participation in difficult board decisions that affected the company’s finances were not the acts of individual agents, did not involve the type of ordinary decisions left to individual managers, and did not confer Wage Act liability. Accordingly, the SJC determined that the trial court should have allowed defendants’ motion for judgment notwithstanding the verdict.

In addition to adjudicating the claim against Johnson and Rose, the SJC also provided guidance for instructing future juries. The Court explained that judges should instruct juries that there are two requirements for a defendant to qualify as an employer under the Wage Act: (1) the defendant must be an officer or agent; and (2) the defendant must have the management of the company. The Court cautioned that juries should be instructed that directors are not agents simply by being directors, and the collective powers of the board are distinct from the powers of individual directors. As to “having the management,” courts should instruct juries that the Wage Act imposes liability on the president, the treasurer, and other officers or agents who perform management responsibilities similar to a president or treasurer, “particularly in regard to the control of finances or the payment of wages.” Id. at 570.

Lessons for Directors and Corporate Advisors

After Segal, it is difficult, but not impossible, to establish Wage Act liability on the part of individual directors. Directors should be aware that they still may face personal liability (with attendant mandatory treble damages and fee shifting) if they are found to be agents of the corporation who performed responsibilities similar to that of a president or treasurer. Consequently, boards and their advisors should take precautionary measures to reduce the risk to directors.

Corporate counsel would be wise to include in companies’ governing documents language stating that individual directors are not authorized to speak or act on behalf of the company. Counsel should then advise boards to abide by such language in practice. While it is common for boards to delegate tasks and authority to particular directors or committees, counsel should screen such delegations carefully to ensure that they cannot reasonably be construed as conferring management or agency authority. Counsel also would be wise to monitor initiatives that might not expressly delegate agency authority but could be deemed to do so by implication.

To the extent a board bestows management or agency authority on individual directors or committees of directors, that authority should be limited to discrete issues. More importantly, that authority should not encroach on officer control over finances and wages. For example, individual directors should not have check-writing authority, control over payroll, or authority to approve or deny wage payments.

Overall, counsel should be vigilant in ensuring that boards and board committees, including compensation committees, exercise their oversight function collectively, with such collective action formally recorded. These steps would help directors perform their fiduciary responsibilities with less risk of personal liability under the Wage Act.

Mark D. Finsterwald is an associate at Foley Hoag LLP and a member of the firm’s litigation department. He focuses his practice in the area of complex business litigation.

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What’s Old Becomes New: Regulating the Sharing Economy

Cohen_Molly Zehngebot_Coreyby Molly Cohen and Corey Zehngebot

Heads Up

The Sharing Economy: An old concept made new through the internet-based sharing of underutilized space, skills, and stuff for monetary and non-monetary benefits.  Recently, a proliferation of start-ups have created digital platforms to connect owners with consumers.  These companies encourage people—and businesses—to use resources more efficiently and to share non-product assets (like time) as well as conventional “stuff.”  Citizens can share space in their homes (Airbnb), seats in their car (Lyft, Sidecar, UberX), places to park (Park Circa), used clothing (ThredUp), outdoor gear (gearcommons), time in the day (TaskRabbit, Instacart), and even capital (Zopa, Prosper).  This trend has attracted significant attention from thought leaders (in 2011, Time Magazine crowned it one of ten ideas that will change the world), venture capital (Uber recently received $258M in funding from Google Ventures, and a recent round of financing for Airbnb would value it above $10B), the media, and, most recently, Congress.  Nevertheless, regulatory mechanisms have not kept pace.

Small-scale, non-monetized sharing has historically been ignored or exempted by the legal system (though barter exchange is taxable).  The tipping point is near, however, as sharing with strangers becomes big business.  Forbes estimates the sharing economy generated $3.5 billion in 2013.  To grossly generalize, the law tends to prefer binary divisions: public and private, business and personal, donation and sale, consumer and provider, and, most saliently, my property and yours.  In the sharing economy, many companies blur these boundaries, resulting in a legal gray area.  Proponents, typically a younger, urban demographic, tend to view the regulatory hurdles as protectionism, serving entrenched operators in the market like taxicabs and hotels.  Yet, for municipalities, regulating sharing economy companies requires balancing the safety and welfare of the public with the potential for new economic development opportunities.

We’ve briefly highlighted a number of legal issues raised by the sharing economy.

Ownership: Can you share something that you don’t necessarily own? The app betrspot allows people to sell spots in line and seats at Starbucks.  The transaction transfers only occupancy and not real ownership, but Starbucks may argue that the seat was a non-assignable license, and therefore cannot be sold.  The earliest forays into the sharing economy—file-sharing systems like Napster—were quickly shut down because of alleged copyright violations.  The newer ventures may involve milder, but still important, questions about the nature of ownership.

Consumer Protection: When looking for a dog sitter on DogVacay, how do you know your pet will be well cared for?  Understandably, there are fears that unregulated transactions can endanger consumer safety.  For example, food exchanged via leftover-sharing sites, such as LeftoverSwap, may have been prepared inexpertly or in unsanitary conditions, creating a public health hazard.  As a solution, many companies have found that a two-way rating system of consumer and provider provides sufficient accountability, by serving as a “a self-enforcing form of consumer protection.”  Peer review and self-regulation foster a sense of community and are less costly than traditional enforcement mechanisms, although researchers have raised concerns that sharing economy participants may exhibit discriminatory tendencies.

Taxation: For tax purposes, is a ride-share provider like an UberX driver running a small business or franchise?  There’s been no consensus about how to tax the “sharing economy” due to the diversity of business types.  In some cases, participants may not be required to pay certain specialty taxes: e.g., it is unclear whether Airbnb hosts are required to pay hotel occupancy tax in most municipalities, but they still pay state and federal income tax.  Indeed, in many situations, it’s less clear how sharing economy transactions should or could be taxed.

Insurance: When you use your personal car to participate in a ride-sharing program for profit, are you covered by commercial insurance, personal insurance, or both, or neither?  In the event of an accident, the driver must rely on his or her personal policy, which may refuse the claim on the ground that the car was in commercial use at the time.

While ride-sharing companies typically provide drivers with commercial coverage, these policies don’t cover damage to the actual car.  (In California, companies provide $1 million liability coverage, higher than Massachusetts’ $20,000 minimum for bodily injury insurance for cabs.)  Moreover, commercial policies may not provide coverage when the driver isn’t operating Uber.  In a tragic San Francisco accident, an Uber driver killed a six-year-old.  While a cab driver would have had insurance through his company, there was no insurance for the Uber driver because he did not have a customer at the time of incident.  Since the incident, Uber has expanded its insurance coverage to include all drivers logged into the app and available for a fare.  More generally, there may be an opportunity for insurance providers to provide novel instruments for individuals and businesses.

Liability: Excited to learn to ski, you rent a pair of skis from gearcommons, only to break your arm in an epic fall down the mountain.  You later discover the skis were defective.  Is gearcommons liable?  While sharing economy companies face similar liability issues as brick and mortar companies, their existence as digital platforms creates new wrinkles.  When things go wrong, injured parties may argue that the provider was negligent in screening participants or goods.  Yet, these companies can argue that they are only technology platforms, serving to connect people or businesses, and therefore should not be held liable.  The companies’ claims reference the federal Communications Decency Act, which protects internet content-providers from liability associated with their content.

Zoning: If you live in an area zoned for residential use, is it a violation to rent out your apartment or condo short-term on Airbnb?  What about space in your private single-family home?  Zoning codes draw sharp distinctions between land uses and may or may not accommodate flexibility of use depending on the municipality.  The demographics of cities are changing, and a population increase in young, single workers has already had impacts on housing stock with the development of the micro-unit.  Coupled with concerns about housing affordability and shifts from a 9-to-5 workday to more freelance and project-based work, this area is ripe for some new thinking.

Licensing/Permitting: Common sense says your “pop-up” potluck shouldn’t need a business license, but how can one be sure?  What about eBay?  Should it be licensed as an auction house?  Many sharing economy companies are corollaries to entities that are already highly regulated and licensed (such as taxicabs, hotels, and restaurants).  It is often not clear whether a shared model would require the same permits and/or licenses as traditional operators.

A few municipalities have addressed these issues head-on, either creating legal exemptions for micro-entrepreneurs (as California Public Utilities Commission did for Lyft), or banning them outright (as Austin did by re-defining “rideshare” to exclude these start-ups).  While many cities have essentially been coerced into regulating ride-sharing due to lawsuits or social media campaigns, other issues—such as short-term rentals—are still nascent.

Boston and the Commonwealth of Massachusetts have not directly addressed these issues (except for a contentious and unenforced ban of Uber).  These are not easy issues to “solve”: the start-ups’ rapid emergence defy long regulatory timelines, and regulation may not be necessary in all cases.  However, cities that are willing to experiment and embrace regulatory innovation may thrive, along with the entrepreneurs who leverage new forms of collaborative consumption.  Though issues of compliance and enforcement are also present, the moment is ripe for Boston to be proactive rather than reactive.  There are tremendous environmental, social, and economic benefits of this activity.  How can the legal community be more open-minded about regulating “sharing?”  Boston has been a leader in developing and operating a bike-sharing program, and recently passed “enlightened” zoning to facilitate urban agriculture.  Tackling the sharing economy could be next.

Molly Cohen is a third-year student at Harvard Law School.

Corey Zehngebot, AIA, AICP, works as a Senior Urban Designer and Architect for the Boston Redevelopment Authority.