THE PERILS OF DELAYING PAYROLL

© Christopher Mason, Smyth and Mason, PLLC, March, 2011
The recession has been tough on cash flow for many companies. Owners, company executives or board members faced with such cash flow problems may be tempted to delay payroll or pay only a portion of wages due until cash flow improves. They often assume they are protected against personal liability for such actions by the corporate form or the business judgment rule. They also assume they can’t be compelled to pay money the company does not have. Unfortunately, those assumptions are dead wrong under Washington law.

In fact, it is not just the employing entity who owes unpaid wages due. Individuals who make the decision not to pay those wages bear equal responsibility for the non-payment. Washington statutes (RCW 49.52.050 and 070) provide that each individual officer or agent of the employer who pays any employee less than their wages due faces personal liability for the amount of the wage that remains unpaid.

That personal liability of individuals is in addition to the liability of the employer company for the unpaid wage. Liability of the employer and the officer or agent involved is “joint and several”. That means the employee can claim against either the employer or the participating officer or agent and their marital community, or both. Imagine a family’s surprise and dismay when they are personally sued by an employee for non-payment of wages and discover their own assets are at risk.

It gets worse. The withholding of wages owed is one of the few areas in Washington law where punitive damages are available to a claimant. When wages are willfully withheld, the employer and each person participating in the failure to pay the wage is individually liable not only for the base wage withheld, but also for punitive (“double”) damages in the same amount (RCW 49.52.070). For example, if $10,000 in wages owed is withheld, an aggrieved employee can sue for $20,000.

Owners and executives also often assume that lack of money to pay wages when they come due is a defense. Wrong again. Our state Supreme Court has held that inability to pay is no defense. Employers and their officers and agents who fail to pay the wage are liable regardless of whether money was available to pay the employee or not. Nor should one assume unpaid severance obligations will be treated differently. Our law says severance is also a wage, with the same personal liability and double damage exposure.

In addition, if an employee wins an unpaid wage lawsuit, courts will always add the employee’s reasonable attorney’s fees and costs to the judgment (RCW 49.52.070). There is also personal liability for that award. Because the law is designed to encourage lawsuits to collect unpaid wages, such attorney fee and cost awards often exceed the amount of wages owed. Moreover, this attorney fee and cost exposure runs solely in favor of an unpaid employee. Unless a written wage contract containing a prevailing party attorney fee clause exists, the employer and any participating officer or agent has no right to recover their own fees and costs incurred from the claimant, even if they successfully defend. And don’t count on liability insurance being available in this context to cover either defense costs or any judgment for the employee. Homeowners’ policies don’t cover business matters as a rule, and many business policies also contain exclusions for non-payment of wages owed.

So what can employers, their officers and agents do to mitigate their risk? First, they can attempt to get agreement in writing from the employee leaving it up to the employer whether the employee will ever be paid. The law provides an exception to individual liability and double damages for unpaid wages when the employee “knowingly submits” to the withholding of wages. But case law has clarified that that defense is only available if the employee intentionally leaves it up to the employer alone whether they will ever be paid. The employee’s decision to continue employment in the face of non-payment is not enough, so long as they still retain their right to be paid.

Second, employers, their officers and agents can attempt to show that there is a “bona fide dispute” as to the employee’s entitlement to the wage. The existence of such a bona fide dispute excuses double damage and individual liability (though not base wage liability of the actual employer). But for a bona fide dispute to exist, the employee’s entitlement to the wage needs to be “fairly debatable”. That is often not the case.

Third, employers and their agents can attempt to show the non-payment was careless and inadvertent. That’s a tough sell in all but the rarest of cases.

Finally, and most importantly, employers, their officers and agents can simply not allow anyone to work whom they are uncertain the company will have the resources to pay. While this approach may also hurt the company, letting people go before they go unpaid can prove way smarter than the alternative: personal liability for base wages, double damages and the unpaid employee’s attorney’s fees and costs. Those amounts add up fast.

Hope may spring eternal, but know the risks before letting employees go unpaid. Otherwise, you and your family may be surprised to find yourself personally exposed to amounts you never imagined you’d have to pay.