Massachusetts High Court Rules That Investors And Board Members Are Not Personally Liable For Unpaid Wages Under State Law

The Massachusetts Supreme Judicial Court recently held that individuals acting as board members and investors cannot be held personally liable under the Massachusetts Payment of Wages Law, M.G.L. c. 149, § 148, for a company's failure to pay wages. Only board members or investors who also served as an officer or agent "having the management" of the company can be subjected to personal liability. This is a significant decision, given that the Payment of Wages Law carries substantial penalties for noncompliance.

Background

The facts of Segal v. Genitrix may sound familiar to anyone who has worked with or for a start-up company. The plaintiff and H. Fisk Johnson, III agreed to form a biotechnology company with plaintiff serving as president and Johnson providing the initial funding. Johnson funded the company through a venture fund that he co-owned with Stephen Rose. Both Rose and Johnson served on the Board of Directors.

A few years after the company's founding, the plaintiff informed the Board that the company was running out of funds to pay its employees. At that point, the venture fund agreed to contribute additional funds, but earmarked those funds for specific purposes. Nine months later, despite having laid off a number of employees, the company was struggling to meet its payroll obligations. At this point, the plaintiff voluntarily agreed to stop taking his salary. A few months later, the Board voted to lay off the company's only other employee.

Plaintiff and the Board could not agree on whether to move forward with the business in some fashion or simply dissolve the company and sell its assets (primarily consisting of intellectual property). During this time, the plaintiff continued to work - without compensation - because he thought he would eventually get paid.

After the company was dissolved, the plaintiff filed a lawsuit under the Payment of Wages Law seeking to recover the value of his unpaid salary. If he prevailed, the statute would also entitle him to mandatory awards of treble damages and attorneys' fees. Because the plaintiff knew that the company could not satisfy a judgment, he also brought claims against Johnson and Rose under the Payment of Wages Law. After the plaintiff prevailed at trial, Johnson and Rose appealed, arguing that, as mere board members and investors, they could not be liable for unpaid wages under the Payment of Wages Law.

The Court's Decision

The Supreme Judicial Court reversed the judgment against...