Labor Law Class Action Seeking to Hold Individual Managers Liable for Wages due Employees Properly Dismissed as to Class Action Claims under Nevada State Law, but Improperly Dismissed as to Class Action Claims under Federal Fair Labor Standards Act (FLSA) Ninth Circuit Holds
Plaintiffs, former employees and their local union, filed a putative class action in Nevada state court against individual managers of the Castaways Hotel, Casino and Bowling Center alleging violations of state and federal labor laws; specifically, the class action complaint alleged that That the three individual managers – the Chairman and CEO, who had a 70% ownership interest in Castaways, the CFO, who had a 30% ownership interest in the Castaways, and the head of labor and employment matters for the Castaways – were personally liable for the state and federal labor law violations because “each defendant had custody or control over the ‘plaintiffs, their employment, or their place of employment at the time that the wages were due.’” Boucher v. Shaw, ___ F.3d ___ (9th Cir. July 27, 2009) [Slip Opn., at 9731, 9734-36]. According to the allegations underlying the class action, plaintiffs were not paid for their final pay period or were paid late, and were not paid for accrued vacation and holiday time. Id., at 9735. Plaintiffs had filed the lawsuit against the individuals because the Castaways was in Chapter 11 bankruptcy proceedings at the time the plaintiffs were fired, and subsequently went through a Chapter 7 liquidation. Id. Defense attorneys removed the class action to federal court, and moved to dismiss the class action complaint for failure to state a claim. Id., at 9736. The district court dismissed the class action because it found “that the defendants were not ‘employers’ under Nevada law, Local 226 lacks standing to bring a claim under Nevada law and the plaintiffs cannot maintain a cause of action under the Fair Labor Standards Act [(FLSA)] against the defendants.” Id. The Ninth Circuit affirmed in part, but reversed as to the class action’s FLSA claim.
The Ninth Circuit opened its opinion as follows: “This appeal raises three issues: (1) whether the Castaways’ individual managers can be held liable for unpaid wages under Nevada law; (2) whether the union has standing to raise the state law claim; and (3) whether the managers can be held liable under the Fair Labor Standards Act (FLSA).” Boucher, at 9734. Because the question of whether individual managers may be liable under Nevada law for unpaid wages was a matter of first impression, the Circuit Court certified the issue to the Nevada Supreme Court – the Nevada Supreme Court held that “individual managers cannot be held liable as ‘employers,’ and therefore that claim was properly dismissed by the district court.” Id., at 9734, 9737-38. That decision rendered moot the second issue on appeal, as it did not matter whether the local union had standing to raise a state law claim that did not exist. Id., at 9734-35. The issue became, then, whether individual managers may be held liable under the FLSA. Id., at 9735. 9738-39. This was not a matter of first impression in the Ninth Circuit. The Court noted at pages 9739 and 9740 that in Lambert v. Ackerley, 180 F.3d 997, 1011-12 (9th Cir. 1999) (en banc), the Ninth Circuit held:
Where an individual exercises “control over the nature and structure of the employment relationship,” or “economic control” over the relationship, that individual is an employer within the meaning of the Act, and is subject to liability…. In Lambert, we upheld a finding of liability against a chief operating officer and a chief executive officer where the officers had a “‘significant ownership interest with operational control of significant aspects of the corporation’s day-to- day functions; the power to hire and fire employees; [the power to] determin[e] salaries; [and the responsibility to] maintain  employment records.’”… “The evidence, moreover, strongly supports the jury’s determination that both Ackerleys exercised economic and operational control over the employment relationship with the sales agents, and were accordingly employers within the meaning of the Act.”… See also Chao v. Hotel Oasis, Inc., 493 F.3d 26, 34 (1st Cir. 2007) (holding corporation’s president personally liable where he had ultimate control over business’s day-to-day operations and was the corporate officer principally in charge of directing employment practices); United States Dep’t of Labor v. Cole Enters., Inc., 62 F.3d 775, 778-79 (6th Cir. 1995) (president and 50 percent owner of corporation was “employer” within FLSA where he ran business, issued checks, maintained records, determined employment practices and was involved in scheduling hours, payroll and hiring employees). (Citations omitted.)
The Ninth Circuit held that the allegations in the class action complaint were sufficient, therefore, to survive a motion to dismiss. Id., at 9740. Indeed, defense attorneys did not challenge the status of the individual defendants as “employers” under the FLSA, but rather “argue[d] that any duty they had to pay wages…ended with the conversion of the Castaways’ Chapter 11 bankruptcy proceeding into a Chapter 7 liquidation.” Id. They cited no authority for this proposition, however, and the Circuit Court rejected the argument. The Court explained at page 9741, “[W]e cannot see how it makes a difference one way or the other whether the Castaways was in Chapter 11 or Chapter 7. The Castaways is not a defendant, and the defendants are not debtors.” Moreover, the Ninth Circuit “found at least two cases holding that individual managers can be held liable under the FLSA even after the corporation has filed for bankruptcy.” Id., at 9744 (citing Donovan v. Agnew, 712 F.2d 1509, 1511, 1514 (1st Cir. 1983); Chung v. New Silver Palace, 246 F. Supp. 2d 220, 226 (S.D.N.Y. 2002)). Accordingly, the Circuit Court affirmed the dismissal of the class action’s state law claims, but reversed the dismissal of the class action’s FLSA claims. Id., at 9745.