Personal liability in employment cases: Are executives in the legal crosshairs? (Part I)

This is the first article in a two-part series examining personal liability in employment lawsuits. To read Part II, click here.

Two supervisors were held personally responsible to pay $450,000 each as part of a $12 million award to a fired employee. The jury found that the plaintiff had been discharged in violation of FMLA rights. In addition, the jury decided there had been an intentional violation by both supervisors who had made statements that they “intended to find grounds for dismissing the employee.” Schultz v. Health & Hospice Corp. (N.D. Ill., 2002).

The U.S. courts have held that managers can be personally liable for wrongs committed in the scope of their employment. Discrimination cases against employers are increasingly accompanied by personal tort actions against individual co-workers or managers. Third parties harmed by employees are also suing managers for negligent supervision. The Equal Pay Act and several other laws allow suit of managers in their personal capacity. Recently, female attorneys sued a New York law firm and its managing partners for sex discrimination in pay. More such cases are anticipated.

What is personal liability?

Personal liability means that legal damages are collected from the individual’s personal bank account, retirement fund, and/or sale of personal property (car, home, collectibles, etc). Though there has always been some degree of personal liability in employment situations, the general rule was organizational liability. The employer paid; individuals did not. That’s changing.

Usually the employer is sued as an entity (The Employer). In a growing number of cases, plaintiffs are naming the employer as well as the individual(s) accused of actually committing the violation. In these cases, the court may award damages against both the organization and the individual manager. In some cases, the plaintiff can elect to collect from either, or both.

Under ERISA, there is personal liability for breach of fiduciary duty. Anyone exercising discretion can be a fiduciary, including owners, clinic directors, board members, HR staff, and office managers.

A trial court has allowed damages to be collected personally from a manager who was responsible for payment of wages and willfully failed to follow the Fair Labor Standards Act’s overtime provisions. Afanassov v. Vor Broker (N.D. Ill., 2002).

Individuals, especially supervisors, are now frequent targets. Companies should warn and train their supervisors in order to avoid such liability.

Why would someone sue you?

1. Adding a personal “tort” action can increase damages (i.e., exceeding the “caps” in the federal discrimination laws).
2. The company may be shaky. If the company goes bankrupt, the individual sued is a backup source of payment in an award of damages.
3. Taxes. Damages collected from the individual are tax free (at least at the time of payment) since collecting them triggers no “employer” withholding. This gives plaintiffs powerful incentive to sue management staff in their personal capacity. In fact, it may now be potential malpractice for a plaintiff’s attorney not to name you personally and seek the tax advantage for his or her client. In Longstreth v. Copple (N.D. Iowa, 2000), a federal district court ruled that a plaintiff could collect $40,000 in damages for an FMLA violation from the individual HR director in addition to damages the employer must pay. This is not the first case stating that individuals can be held liable under the FMLA.
4. Revenge. Some plaintiffs feel harmed and want to seek retribution from those they believe are responsible for their situation.

The old rules are changing

The majority of employment litigation pertains to discrimination claims. Under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, and the Americans with Disabilities Act, only the employer has liability. The perceived individual wrongdoer cannot be sued and is not liable for any damages under these laws, even if he or she behaved with intentional malice. However, the previous protections from personal liability are now being eclipsed by a variety of personal liability causes of action.

Adding a tort case. Adding a tort claim (civil suit) to another form of employment case is a growing plaintiffs’ practice to exceed the statutory damages caps. The most common torts appended to employment cases are invasion of privacy, defamation, assault, conspiracy to harm employment, intentional interference with employment contracts, and negligent supervision. Tort actions can carry both organizational and personal liability.

Workers’ compensation laws protect individuals (co-workers and supervisors) from liability for most workplace injuries. In a number of states, the definition of “injury” includes many sorts of nonphysical harms arising in the workplace, including defamation, negligent harm to profession or reputation, infliction of emotional distress, and other “tort” actions. However, injury caused by intentional acts of the employer or co-workers may not be barred by the workers’ compensation exclusivity provisions.

(Continued)

Laws that allow personal liability

One may name individuals personally as defendants and collect damages from them under several laws. The most common are:

Equal Pay Act (sex discrimination in pay), 29 U.S. Code §201, et seq.

Family and Medical Leave Act, 29 U.S. Code §2601, et seq.

Civil Rights Act of 1866, 42 U.S. Code §1981 (race discrimination). This federal race discrimination statute is being used to challenge more workplace issues, including probationary or at-will discharge, Lauture v. International Business Machines Corp. (2nd Cir., 2000), and discrimination against leased employees, Wal-Mart Stores, Inc. v. Danco (1st Cir., 1999); cert. denied 2000). Section 1981 does not have the Title VII $300,000 liability cap. The sky is the limit! So it is becoming the preferable law for race discrimination plaintiffs. Section 1981 defines race broadly, including certain ethnic and religious groups.

42 U.S. Code §1983 covers acts of state and local governments. This federal law provides that “no person” acting under this government authority may violate the constitutional or legal rights of others. Those accused may be sued in their official or individual capacity.

Americans With Disabilities Act – Title II Public Services – Retaliation. Generally only entities are liable under the ADA. However, the Title II Anti-Retaliation Section has been held to impose personal liability for (and only for) retaliation under the Public Services provisions. Schotz v. City of Plantation (11th Cir., 2003).

U.S. Fair Labor Standards Act (wages and hours, overtime pay), 29 U.S. Code §201, et seq.

Wage claims. Individual owners, officers, and stockholders may be personally liable for unpaid wages if the organization cannot pay.

Safe place acts. Individual employees and owners of facilities may be liable for causation for having unsafe facilities (owners) and for removal of safety devices or failure to report unsafe conditions (employees).

Employment Retirement Income Security Act (ERISA), 29 U.S. Code §301, et seq. Imposes personal liability for breach of fiduciary duty.

Health Insurance, Portability and Accountability Act (HIPAA), 42 U.S. Code §263. Breach of privacy of medical information can result in personal liability.

Omnibus Crime Control Act (Electronic Communication Privacy Act), 18 U.S. Code §2501, et seq. Wiretaps and improper investigation of electronic communication (includes criminal penalties as well as civil liability).

The Sarbanes-Oxley Act and other securities laws hold managers and support staff personally liable for breach of fiduciary or ethical duties in financial, securities, and benefits issues.

The Federal False Claims Act allows suits of any person for “defrauding the government” (“person” can also include corporations and government entities). The law has anti-retaliation provisions allowing any employee who was fired for reporting or objecting to fraudulent practices to sue the person(s) responsible. The act allows triple damages in civil suits, as well as criminal penalties.

Bob Gregg is a partner with Boardman & Clark Law Firm. 

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