Relates to the applicability of provisions relating to liability of shareholders for wages due to laborers, servants or employees for certain foreign corporations

BILL NUMBER:S7897

Title of bill

An act to amend the business corporation law, in relation to the applicability of provisions relating to liability of shareholders for wages due to laborers, servants or employees for certain foreign corporations

Purpose or general idea of bill

The bill ends discrimination against New York corporations and in favor of foreign (out of state) corporations insofar as liability for unpaid wages is concerned.

Summary of provisions

The bill amends Business Corporation Law 630 to treat New York and foreign corporations alike in terms of liability for unpaid wages of employees. Currently liability is imposed only on New York corporations.

Justification

Business Corporation Law S 630 imposes liability for unpaid wages on the 10 largest shareholders of a closely held corporation after a judgment against the corporation has been returned unsatisfied. This statute was part of an historic 19th century compromise in which New York first gave all citizens the right to form corporations and thereby insulate them- selves from personal liability (previously use of the corporate form was permitted only upon an act of the legislature allowing the formation of a corporation to pursue a particular endeavor). When the right to incor- porate was established, some objected that the rights of wage earners would be trampled by use of the corporate form, so the exception for wages was created. In the 1930s, there was a split in the Appellate Divisions as to whether the statute applied to foreign corporations or only to domestic corporations. The Court of Appeals ultimately resolved the question by deciding that the Stock Corporation Law of New York did not regulate foreign corporations. In 1962, when the Business Corpo- ration Law was adopted, it explicitly applied to foreign corporations. But judicial inertia prevented applying the law to foreign corporations, leading one federal court to describe the rule as an historical anachro- nism. Under current law, a corporation, though it does all its business in New York, has an incentive to escape liability for wages by incorpo- rating in a foreign state, thus causing NY to lose revenue. Further- more, there is an anomaly in which the wages of two employees working side by side are treated differently with respect to their remedies for unpaid wages depending on which corporation employs them and whether the corporation is foreign or domestic. The bill ends this disparity. It should be noted that this Legislature recently recognized the problem revealed during the recent economic collapse in which unscrupulous busi- nesses opened and closed without paying wages due their employees. The Legislature increased the penalty for failure to pay wages to 100% of the wages owed. However, the penalty is meaningless if the employee

lacks an effective remedy for recovering his or her unpaid wages. The amendment strengthens existing remedies.

Legislative history

None.

Fiscal implications

It is expected that the bill will encourage more corporations to be formed in New York rather than in foreign jurisdictions.

Effective date

On the sixtieth day after it shall have become law.