Taking The Fall

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

This story appears in the June 1999 issue of Entrepreneur. Subscribe »

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.

A Case In Point

Consider a recent decision made by the California Supreme Court. The case concerned a hospice care nurse who was discharged from her position several weeks after she revealed she had been diagnosed with cancer. The nurse sued both the hospice care agency and her supervisor, claiming she was a victim of discrimination based on her medical condition, an act that is contrary to the California Fair Employment and Housing Act.

Before the courts could consider whether anyone at the hospice care agency had indeed discriminated against the nurse, they had to determine whether the supervisor could be held individually liable. This was a matter of law and precedent. The superior court initially ruled that the supervisor should be dismissed from the lawsuit, but the Court of Appeal reversed the decision, contending that the supervisor could be held liable after all. The supervisor then appealed to the California Supreme Court.

Like many courts interpreting state employment laws, the California Supreme Court justices examined the language of similar federal laws. In a lengthy opinion, they noted the "clear and growing consensus" of courts that supervisors can't be held personally liable for employment discrimination under Title VII, the ADA or the Age Discrimination in Employment Act.

One reason is that Congress specifically exempted businesses with fewer than 15 employees from liability under these laws because of the cost of litigating discrimination claims, so it would make no sense to hold an individual liable. Another reason is that imposing liability on individual supervisors is likely to make it harder for supervisors to make level-headed decisions. As the judges noted in the Court of Appeals case on this subject, "It is manifest that if every personnel manager risked losing his or her home, retirement savings, hope of children's college education, etc., whenever he or she made a personal management decision, management of industrial enterprises and other economic organizations would be seriously affected."

Because the language of the California law is so similar to the language of the federal law, the California Supreme Court agreed with the original ruling that the supervisor couldn't be held liable. Even if the subsequent trial shows that the supervisor in question was guilty of outrageous discrimination, the company, not the individual, has to pay. That doesn't mean supervisors are free to harass or discriminate against members of their staff. The company is very much on the hook because of the supervisor's conduct, and anyone whose poor judgment led to a big lawsuit can expect to be disciplined. "[For example,] a supervisor who sexually harasses someone may not get sued," Karpeles says, "but he can be fired."

On The Other Hand

Other federal employment laws are usually interpreted to allow individual liability. These include the Family and Medical Leave Act (FMLA) and the FLSA, which governs such matters as payment of overtime. These laws use a definition of "employer" that more clearly includes personal liability because it includes "any person who acts, directly or indirectly, in the interest of an employer." That means anyone who was capable of exercising supervisory authority over the plaintiff and who was to some degree responsible for the violation could be left in the lawsuit and found personally liable. For instance, a business owner who knows a key employee is entitled to leave under the FMLA but instead terminates the employee for taking leave may have to answer for it in court.

So what does all this uncertainty mean? "Business owners shouldn't think that because they have an adequately capitalized corporation, they're protected," Karpeles says. Make sure the bylaws of your company provide for indemnification of owners and officers if they're dragged into court in an employment case. Then take extra precautions to avoid these lawsuits in the first place. Make sure you have someone on staff responsible for human resources who can counsel you and your supervisors on the legal side of employment decisions. Be evenhanded in discipline, and keep thorough records of any disciplinary actions. Even if individual owners and supervisors aren't liable, you still don't want to have to defend your company against an employment lawsuit.

Contact Sources

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

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