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June 26, 2018
Company's CEO May Be Personally Liable for CFO's Unpaid Wages
By Steven T. Collis, Holland & Hart LLP

Under the Colorado Wage Act, corporate officers and agents generally will not be individually liable for wages owed to employees. However, according to a recent decision by a panel of the Colorado Court of Appeals, a corporate officer may be found personally liable for an employee's unpaid wages if the employee is able to "pierce the corporate veil" and show the officer's relationship with the corporation is so close that the two are virtually indistinguishable.

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Colorado Wage Act

The Colorado Wage Act governs the payment of wages to private-sector employees in our state. It defines what is considered "wages," when wages must be paid, what must be included in wage statements, and whether deductions from pay may be made, as well as setting forth other requirements to ensure that Colorado employers pay their employees all earned wages in a timely manner.

Under the Act, employees are permitted to attempt to recover unpaid wages by filing a civil lawsuit against their employer. An "employer" is defined in the statute as "every person, firm, partnership, association, corporation, migratory field labor contractor or crew leader, receiver, or other officer of court in Colorado, and any agent or officer thereof, of the above-mentioned classes, employing any person in Colorado" excluding public/government employers.

Corporate Officers Typically Not Liable for Wages

Generally, the company or legal entity that is an employee's "employer" will be the defendant in a lawsuit seeking to recover unpaid wages. Unless some exception applies, the officers and directors of the corporation will not be personally liable for the debts of the corporation.

In a case decided by the Colorado Supreme Court in 2003, Leonard v. McMorris, employees tried to sue the corporate officers for unpaid wages after their employer declared bankruptcy. The supreme court held that the corporation's officers and agents weren't jointly and severally liable for the payment of employees' wages and compensation under the Colorado Wage Act.

However, the supreme court noted that there are well-established exceptions that may make company officers and agents personally liable for a company's debts. Two of those exceptions occur when the corporate veil is pierced and when an officer acts on behalf of an undisclosed principal. The former exception was raised in the recent wage claim case before the Colorado Court of Appeals.

Piercing the Corporate Veil

In Paradine v. Goei, Robert Paradine was employed as the CFO and vice president of administration at Aspect Technologies, Inc. He filed a lawsuit against Aspect Technologies alleging the company failed to make the required wage payments under his employment agreement. He also named Esmond Goei, the company's CEO, as a defendant in his lawsuit.

Goei asked the court to dismiss the claims against him, relying on the Leonard case to argue that he couldn't be held individually liable for the company's debts (i.e., any wages that weren't paid to Paradine). The trial court granted his request to dismiss, but the court of appeals reversed, finding Paradine had provided sufficient proof that he could pierce the corporate veil to hold Goei personally liable.

Piercing the corporate veil requires:

  • Evidence that the corporation was a mere alter ego of the officer;
  • Evidence that the officer used the corporation to perpetrate a fraud or to defeat a rightful claim; and
  • The trial court's evaluation of whether an equitable result will be achieved by disregarding the corporate form and holding the shareholder personally liable for the acts of the business entity.

Paradine alleged that Goei, as CEO of Aspect Technologies, had collected funds for the company and claimed that those funds would be used to pay employees; diverted Aspect Technologies' income and corporate funds for his own personal use; treated the corporation as his alter ego by requiring it to pay his personal expenses (including credit card expenses), apartment lease, and vehicle payments; and commingled his bank accounts and credit cards with the corporation's. The court of appeals found those allegations sufficient to allow Paradine to continue his claims against Goei under a theory of piercing the corporate veil.

Court's Reasoning

The court of appeals first acknowledged what the Colorado Supreme Court stated in Leonard: "We find no provision of the Wage Claim Act . . . that makes the personal assets of officers available for recourse to other employees of the corporation when the hiring entity discharges them." However, the court of appeals went on to analyze the Wage Act and rule that the statute doesn't bar an employee from piercing the corporate veil in certain circumstances.

First, the court noted that Wage Act remedies are meant to encourage employers to timely pay earned wages to employees and that piercing the corporate veil furthers that policy. Second, because the Wage Act is intended to prevent employer fraud, it's appropriate not to exclude from liability under the Act an "employer" whose entire existence may be fraudulent. Third, piercing the corporate veil is a well-established exception to the individual liability of corporate officers and directors, and therefore, it applies in the context of liability under the Colorado Wage Act.

The court of appeals permitted Paradine's wage, fraud, and breach of contract claims to proceed against Goei personally. The court noted that it was taking no position on whether Paradine would be able to successfully pierce the corporate veil on any of his claims, but he had made sufficient allegations to permit his lawsuit against both Aspect Technologies and Goei to proceed.

Closely Held Companies Should Take Note

By applying the piercing-the-corporate-veil exception to wage claims, the Colorado Court of Appeals has made it even more important for company officers, directors, and owners to avoid the types of activities that can lead to individual liability. Officers of closely held or family-owned companies may find themselves particularly vulnerable because the actions that lead to piercing the corporate veil often seem innocuous and benign. For example, commingling funds, using company assets for personal purposes, having the company pay for personal homes, vehicles, or recreational trips, and failing to keep accurate company records can open the door to allegations that pierce the corporate veil. To avoid personal liability, owners and officers should maintain separation between the legal entity/employer and their own personal assets and accounts at all times.

Steven T. Collis is a partner in the Denver office of Holland & Heart LLP and may be reached at stcollis@hollandhart.com.

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