Washington Supreme Court Rules that Employer Decision Makers Can Be Held Personally Liable for Wages that Would Not Have Been Due Until After a Bankruptcy Filing

An employee wage claim filed in federal court presented two questions of Washington state law that the federal judge decided to certify to the state supreme court for authoritative answers:

  1. Is an officer, vice principal, or agent of an employer liable for a deprivation of wages under RCW 49.52.050 when his or her employment with the employer (and his or her ability to control the payment decision) was terminated before the wages became due and owing
  2. Does an officer, vice principal, or agent's participation in the decision to file the Chapter 7 bankruptcy petition that effectively terminated his or her employment and ability to control payment decisions alter the analysis? If so, how?

The Washington Supreme Court answered "yes" to both questions. Allen v. Dameron, No. 93056-2 (Feb. 2, 2017).

The case arose out of a corporate bankruptcy that happened rather quickly. AIS, the company that owed the wages at issue, was declared in default by its senior secured lender on February 14, 2013, and the lender seized control of AIS’s U.S. bank accounts. The AIS Board of Directors "tried to save AIS from its impending bankruptcy," but ultimately failed. On March 14, 2013, the three remaining board members authorized a Chapter 7 bankruptcy filing by AIS.

During the intervening month, the board had convinced the senior lender to release its hold on AIS's bank accounts, but it was not able to secure additional funding. Meanwhile, the CEO of AIS resigned and "the board now authorized every payment AIS made." As the Court recognized, "the circumstances where a member of the board of directors will be liable under the [Washington wage rebate act (WRA)] appear to be rare." However, the Court said the AIS directors were "acting on the de factor officers of AIS." It viewed this as bringing the board members within statutory language that imposes personal liability on any "officer, vice principal or agent of any employer . . . who . . . [w]ilfully and with intent to deprive the employee of any part of his or her wages, . . . pay[s] any employee a lower wage than the wage such employer is obligated to pay such employee by any statute, ordinance, or contract." See RCW 49.52.050, .070. This personal liability is for double the amount of wages owed, plus the employee’s reasonable attorneys’ fees and costs.

Michael Allen, the CFO of AIS, sued two of the former AIS board members under this statute. The paydays for the wages he sought were, respectively, one day and 15 days after the bankruptcy filing. The federal court granted the board members' dismissal motion, "reasoning that (1) the defendants did not have the authority to pay Allen's wages on the dates they became due and that (2) the defendants did not willfully withhold wages from Allen."

The Washington Supreme Court saw things differently. It opined that it was "declin[ing] to allow responsible officers, principals, and agents to circumvent the legislature's intent that employees receive all the wages owed to them simply because the previously established payday date for wages occurs after a chapter 7 filing." Instead, for cases involving bankruptcy, the Court determined it would "look to whether the employer or officer, vice principal, or agent withheld their employees' earned wages 'when [the company] entered chapter 7 liquidation’ instead of on the established payday date" (quoting Morgan v. Kingen, 166 Wn.2d 526, 535 n.1 (2009)). Further, the Court ruled that an officer’s mere participation in a decision to file a chapter 7 bankruptcy that ended the individual’s "ability to control payment decisions, makes it more likely that an officer may be held liable under the WRA because it shows willfulness, the second element required by the WRA."

Although the Washington Supreme Court saw no evidence that its previous WRA case law had "resulted in a business environment where management prematurely leaves corporations in financial distress," it is difficult to imagine these Washington authorities having any other impact. Under the Allen ruling, to avoid personal liability, decision makers for a Washington employer should prevent its funding from dropping below the level needed to immediately pay all wages owed. Necessarily, this will require halting efforts to save a struggling company somewhat earlier in that process. 

Attorney Karen Kruse has substantial experience with Washington State's wage payment requirements and penalties for non-compliance.