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:S4476

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 Section 630(a) of the Business Corporation Law 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

Section 630 of the Business Corporation Law currently 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 themselves from personal liability (previously, the 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 incorporate was established, some objected that the rights of wage earners would be trampled by use of the corporate form, so an exception regarding liability 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 Corporation 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 anachronism.

Under current law, a corporation, though it does all its business in New York, has an incentive to escape liability for wages by incorporating outside of New York State, thus causing New York to lose revenue. Furthermore, 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. This bill would end that disparity. It should be noted that this Legislature recently recognized the problem revealed during the recent economic collapse in which unscrupulous businesses 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

A.6932 of 2013-14 -- passed Assembly, referred to Senate Rules

Fiscal implications

There will be no costs to the State. Instead, it is expected that the bill will encourage more corporations to be formed in New York rather than in foreign jurisdictions by eliminating a disincentive to be incorporated in New York.

Effective date

The sixtieth day after it shall have become law.