Friday, July 31, 2009, 2:23 PM

When Is a Discharge Not a Discharge?

Section 3(d) of the Fair Labor Standards Act, as well as many state laws modeled on it, defines "employer" as including "any person acting directly or indirectly in the interest of an employer in relation to an employee." This seemingly circular language is the reason that the Department of Labor, as well as many plaintiffs' attorneys, is not content to name only the employer as a defendant in wage-hour litigation; instead, at least one owner, executive or other responsible individual is typically thrown into the mix, a tactic which never fails to gain the attention of the person(s) hailed into court.

That's often as far as it goes; rarely do the interests of the defendants diverge, and the outcome, favorable or not, is usually binding on all parties. However, upon occasion there are distinctions, and they can prove extremely vexing for the individuals. An example of this circumstance is found in the July 27 decision of the US Court of Appeals for the Ninth Circuit in Boucher v. Shaw, Thelma Boucher, Ardith Ballard and Joseph W. Kennedy III were employees of a Las Vegas "hotel, casino and bowling center," the Castaways, which filed for Chapter 11 in 2003. Seven months later, the three were among those discharged in conjunction with the failed reorganization of the employer. They filed suit in Nevada state court, claiming unpaid wages and vacation and holiday pay; they were joined in the litigation by their union, Culinary Workers Local 226, which wanted dues payments which the employer had withheld from employee wages but had not forwarded to the union. Named as defendants were the CEO, HR Manager, and CFO of the defunct company; the first two held the entire ownership interest in the Castaways. After the case was removed to federal court, the district court dismissed all claims, and the plaintiffs appealed.

The Ninth Circuit first asked the Nevada Supreme Court for an interpretation of state law, and received the reply that the three managers could not be sued as "employers" under state law since the Nevada definition does not mirror the federal one. That wiped out the appeal as it related to vacation and holiday pay, also disposing of the union's dues claim. As to the unpaid wages count under the FLSA, however, the court reached a different conclusion: While the managers didn't challenge their status as "employers" under federal law, they asserted their wage payment duties ended with the liquidation of the Castaways in the bankruptcy court. While the court said the defendants hadn't explained their defense clearly, that didn't matter; "the managers are independently liable under the FLSA," so the bankruptcy had no effect on their obligations to the plaintiffs.

This decision carries ominous lessons for executives who believe bankruptcy gives everyone a clean slate. In states in which the language of the wage-hour law is like the FLSA's, the implications are that other obligations such as unpaid vacation, holiday and sick pay may evoke a similar outcome. As a cautionary note, please observe that the Ninth Circuit only found that the case shouldn't have been dealt with on a motion to dismiss, but the ruling, unless overturned by a full-bench decision from the Nation's largest appellate panel or by Supreme Court action, will no doubt be relied on far beyond the nine states (AK, AZ, CA, HI, ID, MT, NV, OR and WA) over which the Ninth Circuit has jurisdiction. At the very least, attention may need to be given regarding the wisdom of seeking independent counsel when you're sued.


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