In most instances, shareholders are protected or shielded from the debts and liabilities of a corporation unless the shareholder becomes liable as a result of their own conduct. There are exceptions to this rule, however, that can affect C-Suite executives and other shareholders alike when the company has New York employees.
Shareholder Liability and New York Business Corporation Law
Starting in the 1800’s, with the enactment of the first general corporate law, the state of New York has always imposed some form of liability against corporate shareholders. The law has taken many different forms over the years, the most recent of which was amended on January 9, 2016.
Before 2016, Section 630 of the New York Business Corporation Law applied to privately held domestic companies incorporated in the state of New York. The statute, aimed at protecting unpaid employees, pierced the corporate veil, making the top ten largest shareholders responsible for monies owed to New York employees including unpaid wages, insurance benefits, and pension funds. This provision mirrored a similar obligation set forth in Section 609 of the New York’s LLC Law which was amended in February of 2015 in order to make 10 members of a limited liability corporation with the largest percentage ownership interest personally liable for any unpaid wages owed to New York corporation employees. The LLC Law is also applicable to New York Professional Limited Liability Companies.
In January of 2016, the scope of Section 630 of the Business Corporation Law was expanded by removing the domestic incorporation limitation and including shareholders of foreign corporations where the unpaid employee services occurred in the state of New York. For C-Suite executives who are major shareholders, it is important to speak to an experienced executive compensation attorney in order to understand how and when a shareholder may face this type of personal liability. Following is an explanation of who and what is affected under Section 630.
Section 630(a) applies to the ten largest shareholders determined by the fair value of their interest regardless if that interest is active or passive. A New York employee who is owed wages or benefits can seek payment from one or all of these large shareholders which means that a single shareholder could face liability for the total amount owed.
Wages and Benefits
Under the terms of both the Business Corporation Law and the LLC Law, shareholders can be made liable for unpaid wages, salaries, overtime, vacation pay, holiday pay, severance pay, other compensation, as well as employer contributions toward insurance, annuities, and pensions. A large shareholder can also be held liable for the New York employee’s liquidated damages, penalties, interest, court costs and attorney’s fees.
A New York employee who seeks payment for unpaid wages and benefits is required to first seek payment from the corporation. Thereafter, the top ten largest shareholders can be held liable for any unsatisfied judgments. The employee is also required to provide notice to the shareholder within 180 days after their termination of employment. This deadline can be extended slightly under the terms of the Business Corporation Law if the employee reviews corporation books and records during the initial 180-day time period. In that instance, the employee is required to provide notice to the shareholder within 60 days after the review of records.
The liability of a large shareholder applies regardless of whether or not the individual was aware of the nonpayment of wages and benefits. Further, unlike traditional links between causation and liability, a large shareholder can be held liable for unpaid wages even if they were not responsible for the nonpayment of those wages. C-Suite executives/shareholders should consider consulting an executive employment lawyer to audit wage and hour practices and to confirm that the corporation is maintaining appropriate compliance measures.
It is unclear if the recent amendments to New York laws will cause companies to try and protect its largest shareholders by relocating in order to eliminate employees who provide services within New York state. In the meantime, corporations with New York employees, regardless of where the business incorporated, should review their wage and other employee practices to make certain that all employees are paid the wages to which they are entitled.