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Legislative Memo

Lev Ginsburg
Director of Government Affairs
T 518.465.7511
www.bcnys.org

BILL:

S.7268 (Martins) / A.10443 (Titus)

Support

SUBJECT:

Personal liability of corporate officers for delinquent unemployment contributions

 

DATE:

June 7, 2016

 

The Business Council opposes S.7268 (Martins) / A.10443 (Titus) which would add a new section 573-a to the Labor Law, imposing personal liability for payment of unemployment insurance taxes upon: officers of a corporation; managers and members of limited liability companies with an ownership interest in or management authority over the limited liability company; general partners of partnerships; and limited partners of partnerships to the extent that such limited partners are liable to third parties under the Partnership Law.

This bill is a significant and troubling deviation from current law in a number of ways.

First, the language of the bill is overly broad and holds liable almost all officers of almost every business entity in and outside of New York. In contrast, civil liability for unpaid wages applies only to major shareholders under the state’s Business Corporation and LLC laws, and the BCL excludes such liability for publicly traded corporations. The specific exclusion of publicly traded corporations recognizes the vast differences between the officers of a large parent company and those as the sponsors described as, “unscrupulous employers who evade paying their fair share of UI contributions by closing a business and setting up a new corporation, limited liability company, or partnership.” By casting such a large net, the bill would hold all officers personally liable, whether or not the officers had any involvement in or even awareness of the alleged wrongdoing, simply as a matter of their status.

Second, such an approach is contrary to settled law. In the analogous Labor Law article 6, the courts have consistently held that an individual does not bear civil liability for unpaid wages under Labor Law article 6 merely by serving as an officer, shareholder or agent of a corporation (see Stoganovic v Dinolfo, 92 AD2d 729 [4th Dept 1983], aff'd 61 NY2d 812; Andux v Woodbury Auto Park, Inc., 30 AD3d 362 [2d Dept 2006]). However, Article 6 does impose liability upon "employers" (Labor Law § 190 [3]), and an officer, shareholder or agent of a corporation who qualifies as an "employer" may be subject to a civil suit on that basis (Bonito v Avalon Partners, Inc., 106 AD3d 625, 625-626 [1st Dept 2013] [officer]; Wing Wong v King Sun Yee, 262 AD2d 254, 255 [1st Dept 1999] [shareholder]). Under Article 6, courts consider factors such as whether the individual exercises control of the day-to-day operations of the business, including determination of the rate and method of payment of employees (see Bonito, 106 AD3d at 625).

In discounting the above factors, this bill imposes personal liability in corporate officers without regard to culpability. This move toward further erosion of the purposes of incorporation in New York stymies economic growth and investment in the state by removing even more predictability as to future business and personal liabilities of investors and job creators.

There is no question that those companies that fail to pay unemployment insurance taxes should be held financially responsible, but to take this approach unjustly holds non-culpable parties personally responsible for the acts of others and fails to address the real problem of unscrupulous actors who evade paying UI. A better solution is necessary.

For these reasons, The Business Council opposes S.7268 (Martins) / A.10443 (Titus).