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Owners Held Personally Liable for Back Pay

The U.S. Court of Appeals for the District of Columbia recently held that an owner of a mechanical contractor that had gone out of business was personally liable for back pay arising out of violations of the National Labor Relations Act by the mechanical contractor.

The Carpenters Union started an organizing drive against the Company in late 1998.  Most of the unfair labor practices were committed by the Company from December 1998 and February 1999, however, no unfair labor practice charges were filed against the Company until May 24, 1999.

Commencing in February 1999, the owners of the Company started writing themselves large checks eventually totaling $1.8 million each.  The Company stopped operating September 11, 1999 and its assets were liquidated.

The NLRB found the Company had engaged in many unfair labor practices, and the NLRB’s Administrative Law Judge found that the owners and corporation had failed to keep separate identities and, in order to avoid an injustice, the corporate shield should be pierced.  The NLRB reversed the ALJ’s decision and held that the owners had decided to close down the business before they knew there would be back pay liability, and, therefore, there was no intent to defraud employees of their back pay and the owners should not be held personally liable.

The Court of Appeals recently disagreed with the NLRB, finding that the owners must have known that their conduct was unlawful even though no unfair labor practice charges had been filed and that their payments to themselves were “the labor law equivalent of a daylight robbery” of the assets of the corporation that should have been used to remedy the Company’s unfair labor practice.

The Court was willing to pierce the corporate veil and hold the owners personally liable for the unlawful conduct of their corporation because there was evidence that the assets of the owners and the corporation were commingled, corporate formalities and procedures were disregarded, separate corporate records were not maintained and the corporation was kept in an undercapitalized state.  The Court also found that the owners didn’t decide to shut down the business until after the unfair labor practice charges were filed, and that a manifest injustice would occur if the Court were to allow the owners to avoid paying back pay when they decided to strip assets from the corporation after they realized there might be back pay liability, even though there was no direct evidence that is what occurred.

Carpenters & Millwrights, Local 2471 (A.J. Mechanical, Inc.) v. NLRB, (D.C. Cir., No. 05-1416, 3/16/07), denying enforcement of 345 NLRB No. 22.

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