In a recent decision, the Massachusetts Supreme Judicial Court (SJC) clarified the scope of personal liability for investors and board members under the Commonwealth’s Wage Act, as codified at G.L. c. 149, §§148-150.  The SJC held that investors and board members could not be held personally liable solely by virtue of their investment activity or acts performed in their official capacity as board members.  While the case involved a nuanced set of facts aptly described as “unusual and removed from the core concerns of the Wage Act,” its holding is nonetheless significant, and provides guidance for personal liability under the Wage Act for individuals other than a company’s president or treasurer.

In Segal v. Genitrix, LLC, 478 Mass. 551 (2017), H. Fisk Johnson and Stephen Rose, two former board members of Genitrix, LLC, sought direct appellate review of an adverse jury verdict that found them personally liable for failing to pay wages owed to the company’s former president and CEO, Andrew Segal.  Johnson, Rose, and Segal founded the biotech company, originally a Maryland LLC, in 1997.  Johnson briefly served as a board member during Genitrix’s opening year, but continued to invest in the company until its dissolution in 2007.  Johnson designated Rose as his appointee to the board and advised Segal that Rose was to be his contact for any financial matters.

As a condition to Johnson’s initial investment, he required Segal to execute an employment agreement with Genitrix.  The agreement stipulated that Segal would receive a fixed salary in consideration for his service as the company’s president and CEO, including managing the day-to-day financial and administrative affairs of the company.  Segal, the company’s sole officer, supervised the laboratory, managed all human resource functions, including payroll, and was the only individual authorized to issue wage checks.

The company began to experience financial difficulties in 2006, which led to Segal’s recommendation that the company lay off its at-will employees in order to meet payroll obligations.  In turn, the two defendants invested additional money in the company; however, they earmarked the investment for specific purposes such as funding payroll and replacing lab equipment.  The company’s financial condition worsened in 2007, and Segal unilaterally decided to stop taking his salary.  By mid-2007, the company was unable to make payroll and its board voted to lay off the other remaining employee.  The defendants made a final investment to pay off that employee’s remaining salary obligations and then shuttered the company’s doors.

The company ultimately filed a petition for judicial dissolution.  During those proceedings, Segal filed an array of claims against the company, and also attempted unsuccessfully to block the dissolution of Genitrix, a Delaware LLC.  See Fisk Ventures, LLC v. Segal, et al., C.A. No. 3017-CC (Del. Ch. Jan. 13, 2009).However, Segal did not assert a claim under the Massachusetts Wage Act.  Notably, Segal continued in his role as president while the dissolution proceedings were ongoing, despite continuing to decline a salary.  Segal’s belief that he eventually would get paid for the work did not come to fruition, and he filed a Wage Act claim in 2009.

The defendants were awarded summary judgment on the grounds that they did not “have the management” of the company, as required by the Wage Act.  That victory was fleeting, as the Massachusetts Appeals Court  reversed summary judgment on the grounds that a genuine issue of material fact existed as to whether the defendants managed the company.

On remand, the case went to trial, where the judge instructed the jury, in part, 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.”  The jury went on to find both defendants personally liable based upon the given instruction.  The defendants then moved for direct appellate review on the grounds that there was insufficient evidence at trial to find personal liability, and that the above-referenced jury instruction was erroneous.

In a straightforward reading of the Wage Act, the SJC noted that the omission of investors and board members from the statute was significant.  Thus, the defendants could be personally liable only if they were deemed “agents having management of the company.”  This was the first time the SJC had been tasked with interpreting that language.

In doing so, the Court looked at whether the defendants were agents as a result of their board participation, and whether the restrictions placed on new investments constituted “management” activities.

Segal argued that the defendants exercised sufficient agency authority through their investment influence and board voting rights.  The SJC rejected this argument, and concluded that while “boards are regularly required to make difficult decisions that have an impact on the company’s finances,” such decisions are not acts of individual board members as “agents.”  The SJC also disagreed with Segal’s argument that placing conditions and other restrictions on incoming investments constituted management of the company.  On that point, the SJC held “[i]nvestment restrictions limited to the use of new monies are not management direction and control over existing resources,” and “exercising one’s rights and leverage over infusions of new money are separate and distinct from being an agent have the management of the corporation.”  The SJC also noted that as the only officer of Genitrix, Segal was “the only person expressly identified by virtue of his title as responsible for Wage Act violations,” and that Segal “made the decision not to pay himself.”

Segal is significant as it limits the circumstances in which a corporate director, board member or investor can be found individually liable under the Wage Act.  While personal liability for directors and investors is not entirely foreclosed, it cannot result solely on account of an individual’s position as board member or investor.  According to the SJC, the Wage Act continues to impose personal liability on those assuming individual responsibility as an officer or agent of a company, but it “does not impose individual liability on board members, acting as board members, or outside investors overseeing their investments.”  Given the rapidly expanding startup industry in Massachusetts, Segal provides some comfort that board members and investors will not face exposure to the draconian consequences of the Wage Act, provided that they do not participate in the management of a company to a greater extent than the defendants in Segal.

 

The California Supreme Court recently released its long awaited decision in the class action case Brinker v. Superior Court (Hohnbaum), S166350, in which a class of approximately 60,000 restaurant employees alleged their employer failed to provide meal and rest periods as required under California law. Class action litigation has increased exponentially in California, with meal and rest period cases playing a large role in that increase. The Brinker decision provides clarification regarding issues of scope and timing for meal and rest periods required under California law, and provides further guidance regarding certification of classes for wage and hour claims.

Meal Periods

In a long anticipated ruling, the Court held, with regard to meal periods, that employers need not ensure that employees take 30 minute uninterrupted meal periods, but employers must provide such meal periods, in which the employees are relieved of all duty. Under Brinker, an employer has no responsibility to police such meal breaks to ensure that no work is done.  An employer may be liable, however, if they actually know or should know that an employee is not taking the meal period, or they create incentives to coerce or discourage employees from taking their meal period.

The Court also provided some clarification with regard to the timing of meal periods. Plaintiffs argued that California Labor Code Section 512 and California’s Industrial Welfare Commission Wage Orders should be interpreted to require meal periods on a “rolling” basis.  The Court, however, disagreed and found that a meal period must be provided if an employee works a shift over five hours (with the meal period starting no later than the 5th hour), and that a second meal period must be provided no later than the 10th hour of work. The Court also noted that a first meal period may be waived by mutual consent if the employee works no more than 6 hours on the day in question. A second meal period may be waived if the first meal period is not waived and the employee does not work more than 12 hours on the day in question.

Oral arguments can be viewed here:

Rest Periods

The Court also held that employees are entitled to rest periods of 10 minutes “for each four hours of work or major fraction thereof.”  In this context, a “major fraction” means a fraction greater than one half.  No rest period is required for employees who work a shift of less than 3 ½ hours. Michael Kelly, on Squire Sanders’ blog, Employment Law Worldview, provides a chart which outlines the new rest break requirements as follows:

Under the new Brinker standard, employees are entitled to rest breaks as follows:

 

Hours Worked Rest Periods
0 to less than  3.5 hours None
3.5 up to 6 hours 1
More than 6 up to 10 hours 2
More than 10 up to 14 hours 3
More than 14 up to 18 hours 4

 

The Court did not provide similar guidance regarding the timing of rest periods, noting that the Wage Orders only require that rest breaks fall in the middle of work periods “insofar as practicable.” As such, employers are advised to make good faith efforts to provide rest breaks in the middle of a work period, but practicality provides flexibility for the timing of such breaks. It is important to note that for rest periods, there is no “relieve of all duty” standard.

It is important that California employers review their current policies and ensure that they are current and comply with the above requirements. It is also important that employers review time sheets to ensure breaks are taken and that incentives are not created to discourage meal periods. As any employer without a clearly communicated policy is vulnerable to such class action litigation, it is also advisable to inform employees directly of such policies. Employers should also consider the following issues in light of Brinker when reviewing their policies:

 

  • What record keeping will be used to provide proof of meal periods and rest breaks? And how often will these records be reviewed to ensure compliance?
  • Establish what constitutes “relieve of all duty” for purposes of a meal period.
  • Establish a policy for supervisors to ensure employees are not discouraged from taking breaks or coerced.

More information on Brinker and its impact can be found on LXBN