Piercing the Corporate Veil for Wage Claims and the Economic Reality Test

When an employee believes that he or she has not been paid wages due to him or her, one of the most important questions is who is the “employer” under the various federal, state, and local laws. This is important because an “employer” may be liable for unpaid wages and other related damages under the Fair Labor Standards Act, the Maryland Wage and Hour Law, the Maryland Wage Payment Collection Law or various county codes.  The employee may have several “employers” under these laws and against whom he or she can impose liability - especially important if the corporate employer is insolvent.

A case from the Maryland Court of Special Appeals recently addressed this issue but did so with a twist. The Court utilized the well-known “economic reality test” from the FLSA, but in the context of corporate veil piercing, which allows a court to disregard entity-level protections and impute liability to the business’s owners.  Piercing the corporate veil is difficult in Maryland, and a court will only disregard the corporate entity to prevent fraud or for a paramount equity.

The facts of the case seem to further muddy the veil piercing test.  According to the opinion, the entity that operated the restaurant was “Teppanyaki Gill & Supreme Buffe[sic], Inc.,” for which Articles of Incorporation were filed in January 2014. However, the plaintiffs-employees argued that Teppanyaki operated as a sole proprietorship and that Appellant, who did not incorporate Teppanyaki and was not its sole director, was its actual owner and should be liable for Teppanyaki’s wage failures.  (A default judgment was entered against Teppanyaki.)  The employees pointed to the facts that Appellant signed a lease and two amendments for the commercial space, and in doing so represented in one of the amendments that he was “an individual dba Teppanyaki Grill and Supreme Buffet.” 

The trial court ultimately ruled that Appellant was the actual owner of the business and was liable, but did not state whether it relied on the economic reality test under the FLSA or veil piercing under state law.

Addressing these issues, the Court of Special Appels parsed out several overarching issues:

•       “There is generally a consensus among the federal circuits that a company’s owners, officers, or other supervisory personnel may be held individually liable for FLSA violations, regardless of whether they have chosen to do business in the corporate form.[] Thus, at the federal level at least, it is unnecessary to pierce the corporate veil to find individuals within a corporation personally liable for violations of the FLSA.

•       To determine whether an individual qualifies as an employer under the FLSA, the MWHL, and the MWPCL, both Maryland and Federal courts apply the economic reality test.

•       The economic reality test for “control” examines “four factors to determine an individual’s level of ‘control’ over an employee.”

•       The factors are “whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.””

So far, none of this is groundbreaking.  The interesting part is when the Court talks about piercing the corporate veil under state law to impute liability on the business owners without resort to the economic reality test. 

Regarding the employees’ sole proprietorship argument, the Court rightfully recognized Teppanyaki’s corporate status and stated that “it would be necessary to apply the economic reality test in order to determine whether Appellant could be held individually liable as an employer; unless, perhaps, the corporate veil can be pierced to hold an individual accountable as owner of the company.”

This is where things got more interesting.  Noting that Maryland is more restrictive in piercing the corporate veil, the Court summarized the alter ego/paramount equities theory of veil piercing:

•       “[W]hen substantial ownership of all the stock of a corporation in a single individual is combined with other factors clearly supporting disregard of the corporate fiction on grounds of fundamental equity and fairness, courts have experienced “little difficulty” and have shown no hesitancy in applying what is described as the “alter ego” or “instrumentality” theory in order to cast aside the corporate shield and to fasten liability on the individual stockholder.”

The Court ultimately remanded the case back to the trial court to render factual findings as to the theory of liability on which it relied, and essentially provided a roadmap for these theories.  However, in doing so, the Court seemed to endorse veil piercing for the unpaid wages based on the alter ego theory.

This raises several questions. The opinion never stated that Appellant owned any Teppanyaki stock or that he was, in fact, Teppanyaki’s owner.  The trial court would have to determine that Appellant was the nominal owner of Teppanyaki notwithstanding the corporate formalities showing that another individual was the technical owner because veil piercing typically imputes liability on the business owners, not third-parties (“[W]hen substantial ownership of all the stock of a corporation in a single individual is combined with other factors…. [] and to fasten liability on the individual stockholder”).  Additionally, the trial court would have to determine that Appellant disregarded the corporate form, which is made more difficult with close corporations (as alluded to by the Court).

Moreover, it is unlikely that the mere “unfairness” of employees not being paid their wages would suffice to meet the paramount equity test under Maryland’s more restrictive approach to veil piercing. There is very little caselaw of any party meeting the paramount equity standard in Maryland. Relying on the corporate form to prevent personal liability is almost always unfair from a plaintiff’s perspective because it reduces, or eliminates, the possibility of collecting a judgment. 

For example, failing to pay wages is not necessarily fraudulent, just like failing to pay pursuant to a contract is not necessarily fraudulent.  Is it unfair to the employee or contract counterparty?  Sure, but without something more it is unlikely that a Maryland court will disregard the corporate form just because a debt has not been paid – even if that debt is a wage. 

Summarizing, an employee has three ways to determine employer liability under wage laws:

(a)   The economic reality test (easiest from a conceptual and practical standpoint)

(b)  For a sole proprietorship, usually can impose liability on the owner since there is no entity level protection (middle level)

(c)   For a limited liability company or corporation, veil piercing if the employee cannot meet the economic reality test (most difficult).

The case is Qun Lin v Jose Reyes Cruz, et al., and can be found here.