May Individuals Be held Liable for a Corporation’s Payment Obligations Under the Colorado Wage Act
In Leonard v. McMorris, 63 P.3d 323 (Colo. 2003), employees sued corporate officers individually for unpaid wages after the Company declared bankruptcy. The Colorado Supreme Court held that the corporation’s officers and agents were “not jointly and severally liable for payment of employee wages and other compensation” under the Colorado Wage Act.” In reaching this result, the court stated that “[i]n the absence of some exception, neither the officers nor the directors of a corporation are personally responsible for the debts of a corporation merely because they are officers or directors of the corporation.”
The Leonard decision was recently interpreted by the Colorado Court of Appeals in Paradine v. Goei, 2018 COA 55 (Colo. App. 4/19/2018). In that case, the Plaintiff, the former Chief Financial Officer and Vice President of Administration for a corporation called Aspect Technologies, Inc., sued the company and Goei, its Chief Executive Officer, in part, for unpaid wages under the Colorado Wage Act.
The Plaintiff sought to impose liability on Goei on a “piercing the corporate veil” theory of liability. Generally, a duly formed corporation is treated as a separate legal entity, unique from its officers, directors, and shareholders, who are not liable for the corporation’s debts. An exception to this rule exists under a piercing the corporate veil theory, under which the corporate veil is “pierced” and liability is imposed on the individual officers and/or shareholders of the corporation. Generally, the courts consider a variety of factors in determining whether to pierce the corporate veil, including: (1) the corporation is operated as a distinct business entity, (2) funds and assets are commingled, (3) adequate corporate records are maintained, (4) the nature and form of the entity’s ownership and control facilitate misuse by an insider, (5) the business is thinly capitalized, (6) the corporation is used as a “mere shell,” (7) shareholders disregard legal formalities, and (8) corporate funds or assets are used for noncorporate purposes.
In Paradine, the trial court dismissed the Wage Act claim against the individual defendant, holding that Leonard barred individual liability under the statute, even under a piercing the corporate veil theory.
On appeal, the Colorado Court of Appeals reversed dismissal of the Wage Act claim against the individual Defendant, holding that Leonard was not meant to prevent plaintiffs from piercing the corporate veil in Wage Act claims under appropriate circumstances.
The Court of Appeals reasoned that the remedies under the Wage Act are designed to encourage employers to make timely wage payments to employees. Piercing the corporate veil in the right circumstances would further this legislative intent. The Court of Appeals also recognized that the Wage Act was adopted to combat employer fraud and oppression. Thus, logic suggested that the legislature would not exclude an employer whose existence may be fraudulent from the reach of the Wage Act. The Court of Appeals also reasoned that Leonard’s fundamental premise was that the Wage Act incorporated common law principles, including the concept of piercing the corporate veil and that officers or agents could be liable for the corporation’s debts under appropriate circumstances. Finally, the Court of Appeals interpreted Leonard to hold that a corporation’s officers and agents are not always liable under the Wage Act; but may be come liable if one of the well- established exceptions, such as piercing the corporate veil, applies.
The significance of the Paradine case is that the Colorado Wage Act does not unconditionally bar individual liability of corporate officers and employees. Instead, such liability may be imposed on such individuals under a piercing the corporate veil theory. This offers employees the opportunity to recover wages against individual managers or owners in the event an employer declares bankruptcy or is otherwise unable to pay unpaid wages under the Wage Act and should cause individual managers to ensure compliance with a corporation’s Wage Act obligations.