Taking The Fall

From owners to officers, sweeping lawsuits are bringing down entire companies. Exactly who's liable? Courts are divided.

Employees who believe their legal rights have been violated at work often sue for damages in comprehensive lawsuits that name the company, its owners and officers, and the supervisors involved. But can owners officers and supervisors be held liable as individuals under federal and state employment laws? That depends on which law the employee sues under and how the courts interpret its language.

In such laws as the Americans With Disabilities Act (ADA), the Fair Labor Standards Act (FLSA) and Title VII of the Civil Rights Act of 1964, Congress made clear that an employer--meaning company--is liable for violations. It's a long-standing legal principle that a business is responsible for the wrongdoing of those acting on its behalf, provided they're operating within the scope of their employment.

What's not clear, according to federal laws, is whether small-business owners are personally liable for the wrongdoing of their managers, and whether the managers whose decisions supposedly broke the law can be made to pay relevant fines out of their own pockets. State employment laws are often no clearer. In a typical lawsuit, the individuals named have to go to court to get their names removed from the lawsuit, and the court has to examine the wording of the law and how previous courts have interpreted it before deciding whether or not to dismiss the individuals from the lawsuit. Only then can the lawsuit proceed to trial.

Michael D. Karpeles, head of the employment law department at Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz Ltd. in Chicago, says plaintiffs typically name individuals in hopes of tapping other deep pockets, since the owner or manager may have insurance to cover a judgment. They may also be angry enough with the person whom they believe treated them poorly that they want to get even. Naming individuals can also be a strategic move for plaintiffs hoping to garner a lucrative settlement. Owners or managers who are losing sleep over the prospect of having their personal assets drained may push the company to settle the lawsuit--by paying off the plaintiffs and releasing the individuals from liability.

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This article was originally published in the June 1999 print edition of Entrepreneur with the headline: Taking The Fall.

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