While it appears that the Sixth Circuit has never directly answered the above question, there is an argument to be made that, at least under certain circumstances, an employer ought not be allowed to underpay its employees and, then, add insult to injury by filing for bankruptcy protection to avoid paying a judgment.
The Fair Labor Standards Act requires most employers to pay all non-exempt employees at least minimum wage, as well as one and one half of an employee’s regular hourly wage for all hours worked beyond forty per workweek. As a disincentive to employers who might try to skirt the FLSA, the Act provides that an employer who violates the Act is generally liable to an aggrieved employee for not just the amount of wages it failed to pay, but for an additional equal amount in the form of liquidated damages, as well as for the costs and attorney’s fees associated with any lawsuit the employee brings to enforce her rights.
In short, the FLSA is a statute with teeth.
What happens, though, if an employer, say an Atlantic City hotel, decides that it would rather file bankruptcy than pay its debts, and, what if some of those debts are unpaid minimum or overtime wages?
In In re Jercich, the Ninth Circuit addressed this issue in the context of a judgment for unpaid commissions. An employee who had been stiffed by his employer won a state trial court judgment for unpaid commissions, as well as punitive damages. The employer appealed and, during the pendency of that appeal, filed Chapter 7. The bankruptcy court ruled that the state court judgment was dischargeable debt.
Overturning the bankruptcy court’s decision, the Ninth Circuit looked to § 536(a)(6) of the bankruptcy code, which states that debts arising from “willful and malicious injury by the debtor to another entity or to the property of another entity” are not dischargeable. The court held that, at least in the context of breach of contract, where there is some form of tortious conduct that gives rise to a willful and malicious injury, the debt is not dischargeable.
Finding that California law allows tort recovery in contract claims when the breach violates a fundamental public policy, and that California has held that prompt wage payment is a fundamental public policy, the court endeavored to determine whether the breach was willful and malicious.
An act is willful, the court determined, when, as the Sixth Circuit determined in In re Markowitz, the debtor either actually desires the resulting harm or knows that the harm is substantially certain to occur. An act is malicious when it is: (1) wrongful; (2) intentional; (3) necessarily causes injury; and (4) is done without just cause or excuse. Applying these standards, the court determined that: the debtor knew he owed the employee the commissions and deliberately chose not to; that injury was substantially certain to occur if the commissions were not paid; and that there was no just cause or excuse for the non-payment, as the employer had the ability to pay.
Adhering to the bankruptcy’s code’s fundamental policy that fresh starts are reserved for the “honest but unfortunate” debtor, the court held that the judgment was not dischargeable.
The attorneys at Sobel, Wade & Mapley have experience recovering unpaid overtime wages through each stage of litigation. If you think you have not been compensated fairly by a current or former employer, contact SWM for a free initial consultation.