United States: Judicial and Legislative Help for Colorado Companies

Over the past few months, companies based in Colorado have received welcome news from both the Colorado legislature and courts with regard to employment issues. This article describes the recent developments with which businesses operating in Colorado should be familiar.

Effective August 7, 2003, the Colorado Wage Claim Act, Colo. Rev. Stat. Section 8-4-101 et seq. (the "Act") was amended in ways that we believe will encourage settlements of wage claim disputes. Originally, the Act was intended to help employees obtain payment for wages and compensation due from an employer or former employer. Over the years, the Act has provided ample opportunities for employees to seek, and often recover, compensation and litigation costs far in excess of amounts that they were actually due by encouraging litigation against well-intentioned employers. The recent revisions to the Act mitigate these risks by providing greater clarification and guidance with respect to the calculation and payment of wages to terminated employees.

Under the Act, employers previously could not withhold money from an employee’s final paycheck when an employee retained employer money or property following termination. The revisions to the Act now permit an employer to withhold part of an employee’s final paycheck for up to 10 days following termination if the employee does not return employer property when the employment relationship ends. The employer may also permanently withhold payment from the employee for the fair market value of the property if the employee fails to return it during the 10-day period. Parties should be aware, however, that an employee still has a right to penalties if an employer withholds more than the fair market value of the property. The fair market value of the property is not the original cost of the property and it may be less than the book value of the property. Therefore, employers should be careful when determining this value.

The attorneys’ fee provision of the Act were revised to encourage settlements of wage claims, a revision that we believe is beneficial to employers. Previously, the Act provided that the prevailing party in a lawsuit was entitled to recover its attorneys’ fees. An employee would be the prevailing party if he or she recovered any amount, even if the amount was far less than the amount sought. This provision placed employers in difficult situations when an employee made a claim for wages owed that far exceeded the amount actually due. Under the revised Act, attorneys’ fees are awarded based upon whether the amount recovered at trial is less than or greater than the amount tendered by the employer to the employee at the time of termination. Once an employer tenders the amount of wages it believes to be due, an employee runs the risk of having to pay the employer’s legal fees if the amount recovered at trial is less than the amount tendered.

Finally, the Act was revised in various ways to clarify ambiguities, including the definitions of "wages" and "compensation." As a result of these changes and the other changes described above the revised Act is a significant improvement for Colorado companies. However, plenty of pitfalls remain for unsuspecting employers.

The recent legislative changes to the Act follow closely on the heels of a major decision issued by the Colorado Supreme Court in a closely watched case regarding personal liability under the Act. In Leonard v. McMorris, the Colorado Supreme Court held that officers and agents of a corporation doing business in Colorado do not have personal civil liability for wages or other compensation the corporation owes to its employees but fails to pay.

The case arose in the context of the bankruptcy of NationsWay, one of the nation’s largest privately held trucking companies in the United States. At the time it filed for bankruptcy protection, NationsWay had approximately 3,500 employees, of which 1,000 were in Colorado. When NationsWay filed for bankruptcy, it also terminated most of its employees. Certain employees of NationsWay subsequently filed suit, alleging that eight officers of the corporation were personally liable the Act for $12 million in earned but unpaid wages and vacation pay that the employees were unable to collect in NationsWay’s bankruptcy proceedings.

In 1992, the Colorado Court of Appeals had determined in Cusimano v. Metro Auto, Inc. that officers of corporations could be individually liable under Colorado’s Wage Claim Act for unpaid wages and other compensation. The Colorado Supreme Court specifically overruled the earlier Cusimano case, finding that Colorado’s 102 year old Wage Claim Act was never intended to make corporate officers liable for unpaid wages. In this regard, the Colorado Supreme Court found the Act differed from the statutory schemes in other states, such as Illinois and Kansas, that expressly provide for personal liability for officers for unpaid wages. The Colorado Supreme Court stressed that because personal liability for corporate officers would be such a dramatic departure from standard corporate law principles, that it would have expected the General Assembly to specifically have stated such an intent.

The implications of this case will be very significant for corporations that do business in Colorado. The dissent strongly argued (albeit unsuccessfully) that the opinion sends the wrong message to corporate officers in the recent environment of corporate scandals and increasing focus on corporate responsibility. The outcome of this case certainly was not a favorable one from the perspective of employees and one can envision some businesses trying to use the decision to take advantage of their Colorado employees in the future.

From the viewpoint of corporations and their officers, however, the decision generally provides a great deal of protection and clarity. The Colorado Supreme Court specifically refused to limit the applicability of the decision to the bankruptcy or insolvency context, noting that requiring corporate officers to act as sureties for wage payments out of their personal assets would be a substantial deterrent to serving as an officer of a corporation. Previously, many corporations that were aware of the risk of personal liability in Colorado had obtained insurance to provide additional protection for their officers, particularly because many indemnification agreements are not enforceable in bankruptcy. Some companies may need re-evaluate their insurance policies in light of this decision. In addition, officers of Colorado businesses contemplating filing for bankruptcy protection no longer will have to worry about the implications that their decision will have on their personal assets.

Corporations and their officers should continue to be aware that they may have personal liability for unpaid wages under the laws of other states to the extent they have employees outside of Colorado. Wage laws vary from state to state, with some jurisdictions imposing civil liability on officers for unpaid wages based on their high-ranking status and/or for willful or knowing violations. In addition, under current law, the President, Treasurer or other responsible officers of a corporation can be personally liable for failing to properly withhold federal or state employment taxes, even if the corporation has outsourced the payroll function.