Jun 24, 2014

Withholding pay can cost you as an employer

    Corporate officers must be mindful when deciding whether to pay a departing employee severance or other compensation under Illinois law. If the company has an agreement or otherwise promised an employee a severance payment, and fails to make the payment, corporate officers may be personally liable under the Illinois Wage Payment and Collection Act (Wage Act). A recent Illinois case illustrates the risks to corporate officers who knowingly permit a violation of the Wage Act.

    In Elsener v. Brown, the Illinois Appellate Court recently reaffirmed that a corporate officer who knowingly directs or permits his or her company to refuse to pay an employee earned compensation can be personally liable under the Wage Act.[1] In Elsener, the plaintiff, Mr. Elsener, signed an employment agreement with Brown Business Ledger, LLC that provided him with a severance payment equal to the duration of his non-competition obligations in the event he was terminated without cause. This payment would be in excess of $156,000. 

    Mr. Elsener was terminated without cause. When he made demand for payment of his severance, the company claimed it was unable to pay his severance due to financial troubles. The company’s president, a defendant in the action, claimed that the company’s financial troubles made it impossible for the severance payment to be made. The company eventually filed for bankruptcy.

    In finding that the company’s president was personally liable for the unpaid severance, the court pointed out that the company paid other business expenses at the time the severance was due. The company’s ability to pay certain expenses to the exclusion of Mr. Elsener’s severance supported a finding that the company’s president knowingly permitted the company to fail to pay the severance. As a result, the Court held that personal liability against the company’s president was proper.

    The holding in Elsener should be a cautionary tale for corporate officers involved in company decisions to fail or refuse to pay agreed upon compensation.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client Alert authored by: Ryan A. Haas

[1] 2013 IL App (2d) 120209.