Massachusetts High Court Addresses Investors’ and Boards of Directors’ Liability Under the Wage Act

Investors and members of boards of directors concerned about liability under the Massachusetts Wage Act, M.G.L. c. 149, § 148, can breathe a little easier after the Supreme Judicial Court’s (SJC) decision in Segal v. Genitrix, LLC, No. SJC-12291 (December 28, 2017). In Segal, the SJC refused to hold investors and individual directors individually liable for a company’s failure to pay wages to an employee because they were not empowered to act as “agents having the management” of the company. As the SJC’s decision shows, mere knowledge of Wage Act violations won’t be enough for liability.

Background

Andrew Segal was the president and chief executive officer of Genitrix, a biotechnology startup that never employed more than five full-time employees. Segal was the sole officer of the company and managed its finances, including its payroll functions. H. Fisk Johnson III and Stephen Rose were both investors and board members of Genitrix. While Johnson had the ability to terminate Segal’s employment as third-party beneficiary of Segal’s employment agreement with Genitrix, the record evidence established that Rose “sp[oke] for” Johnson in financial matters.

Not long after its creation, Genitrix began to struggle financially. Segal informed the board that the company was “running out of funds to pay its employees.” To address Segal’s concerns, Johnson and Rose continued to invest money in Genitrix, but Rose earmarked the funds for specific purposes. Despite these cash infusions, Genitrix could not meet all of its payroll obligations. Segal then proposed a number of cash-saving proposals, including his decision to stop taking his salary. The board, including Johnson’s appointees, rejected Segal’s cost-cutting proposals. The company was later dissolved, and Segal sought to directly recover his unpaid salary from Johnson and Rose under the Wage Act.

The SJC’s Decision

The Wage Act imposes individual liability on “[t]he president and treasurer of a corporation and any officers or agents having the management of such corporation”—which the SJC previously concluded as including not only traditional corporations, but also limited-liability companies. An officer or agent has sufficient management of a company only if he or she is “someone who controls, directs, and participates to a substantial degree in formulating and determining [its] policy.” Finally, agency exists where “there is mutual consent, express or implied, that the agent is to act on behalf and for the benefit of the principal, and subject to the principal’s control.”

Because neither Johnson nor Rose was an officer of Genitrix, the SJC focused its analysis on whether they were agents, and if so, whether they had management of Genitrix. Beginning with agency, the SJC found that Johnson’s rights as a third-party beneficiary under Segal’s employment agreement cloaked Johnson and—by virtue of Johnson’s statement that Rose “sp[oke] for” him—Rose with “limited express agency authority” to act on behalf of the company. Turning to management, the SJC held that merely being investors and directors of Genitrix was not enough to establish management. Generally, a board of directors, acting collectively, is not the agent of a company because it is not subject to another’s (namely, the company’s) control.

Next, the SJC deemed the board’s rejections of Segal’s cost-cutting proposals insufficient to impose liability on Johnson and Rose as individual directors because those rejections were acts of the board acting collectively, “not the acts of individual board members as agents.” With respect to Rose’s investment activities, the SJC acknowledged that Genitrix’s LLC agreement expressly prohibited Johnson and Rose from “exercising agency authority on behalf of the company in their role as investors.” Though Rose had earmarked invested funds for specific purposes (none of which was to pay Segal’s salary), the SJC found that such decisions were not management of Genitrix. According to the SJC, “exercising one’s rights and leverage as an investor over infusions of new money are separate and distinct from being an agent having the management of the corporation that is seeking the additional financing” because “[i]nvestment restrictions limited to the use of new monies are not management direction and control over existing resources.” As a result, none of Johnson’s or Rose’s activities as directors or investors gave them management of Genitrix, and they could not be liable to Segal under the Wage Act.

Key Takeaways

Segal is of particular interest because the SJC took direct review of what would appear to be a unique situation involving a small group of players. Accordingly, the decision suggests that the SJC was trying to insulate investors and directors from Wage Act liability based on ordinary investment or routine board activities—even when they take such action with knowledge that the company will not be able to pay an employee’s wages as a result of their decisions. Instead, it appears that investors and directors will face potential exposure under the Wage Act only where the board has empowered them to act as officers or agents having management of the company. In light of this opinion, investors and members of boards of directors in Massachusetts may want to structure their businesses accordingly.