A general rule of corporation law is that shareholders are not liable for the corporation’s debts – including wages owed to its employees. But there are exceptions to the rule. One of those exceptions is found in Sec. 630 of the New York Business Corporation Law. That statute provides that the ten largest shareholders of privately held corporations may, under certain circumstances, be held liable for the unpaid wages owed to its employees.
At one time Sec. 630 applied only to shareholders of New York’s domestic corporations. But a recent amendment expands that potential liability to include shareholders of foreign corporations when the unpaid services were performed in New York.
Sec. 630 of the New York business corporation law
New York has had a statute making shareholders potentially liable for employees’ wages since 1848. Historically, New York was not the only state with a provision that allowed workers to collect pay from shareholders. However, over the years, other states dropped those provisions while New York did not do so.
When New York enacted its current corporation law in 1963 it included Sec. 630, but the section only applied to shareholders of New York’s domestic corporations. That aspect remained until January 9, 2016 when an amendment, enacted by Assembly Bill 737, expanded its reach to include shareholders of foreign corporations where the unpaid services are performed in New York.
Here are some aspects of Sec. 630 that every shareholder of a corporation with New York employees should be aware of:
- The provision applies to the ten largest shareholders as determined by the fair value of their interest.
- It does not apply to corporations whose shares are sold on a stock exchange.
- Liability is for unpaid wages, salaries and other compensation and benefits payable by an employer for services performed for the corporation including overtime, vacation, holiday and severance pay, employer contributions to insurance or welfare benefits, pension or annuity funds.
- The employee has to try to recover the unpaid amount from the corporation first. Only if a judgment against the corporation remains unsatisfied can the employee try to recover from the shareholder.
- The employee must first give notice to the shareholder of his or her intention to hold the shareholder personally liable under Sec. 630. That notice must be provided within 180 days after the termination of the services performed for the corporation.
- Liability is joint and several, meaning the employee can go after one or a few of the shareholders for the whole amount rather than all of the top ten. And if the employee is successful, the shareholders who were sued can seek contribution from the rest of the top ten shareholders.
Potential liability of owners of LLCs and corporations
For years Sec. 630 had been cited by some as a reason why New York based small businesses would avoid incorporating in New York and would instead form a New York limited liability company (LLC), or, incorporate in another state (typically Delaware) and register in New York as a foreign corporation.
Last year, a change to the New York LLC law removed the option of forming a New York LLC as a way of avoiding shareholder liability for unpaid wages. The New York LLC law was amended to add a provision based on Sec. 630 which imposed liability on the top ten members. For a discussion of the New York LLC law changes, see our previous article.
Currently, the recent amendment to Sec. 630 of the New York Business Corporation Law (per Assembly Bill 737) has removed the option of avoiding shareholder liability by incorporating in Delaware or another state and registering as a New York foreign corporation.
CT Observation: Proponents of this most recent amendment state that it will encourage more corporations to be formed in New York rather than in foreign jurisdictions. Opponents argue that it will discourage corporations from doing business in New York. The impact remains to be seen.