Dispute Between Business Partners Ends In Dissolution and Double Damages Under Connecticut Wage Act

In Saunders v. Firtel, a decision to be officially released on September 22, 2009, the Connecticut Supreme Court upheld an award of double damages under Connecticut’s wage and hour laws in what amounted to a dispute between two business partners, Barry Saunders and Burton Firtel.  The supreme court also upheld judicial dissolution of a company owned by the partners.  The case highlights the complications that can arise between partners when one partner is also an employee in the business.  

In this case, Saunders became part owner of a company that Firtel previously formed by himself.  Saunders also became an employee of the company as part of a larger business relationship.  This is not an uncommon arrangement in business, especially when a small business is purchased by a larger company.    Saunders and Firtel also formed another limited liability company together as equal owners. The business relationship was documented with an operational agreement. 

Although the partners successfully operated the business for years, a dispute arose out of unpaid wages after Saunders unsuccessfully tried to change the compensation structure of the business relationship.  In response, Firtel fired Saunders.  Saunders brought a lawsuit in Connecticut state court for unpaid wages claiming he was an employee.  He also sought to dissolve the limited liability company formed with Firtel. 

A few months ago, Connecticut’s wage and hour laws were in the national spotlight because of the scandal with AIG’s bonus plan for its employees in Wilton, Connecticut.    AIG claimed that it had to pay the bonuses because it feared double damages under Connecticut’s wage and hour laws.  In this instance, Saunders brought his case in court relying on the same provisions that AIG feared. 

Connecticut’s unpaid wage law, General Statutes section 31-72 ,provides that:

When any employer fails to pay an employee wages . . . the employee may recover, in a civil action, twice the full amount of such wages, with costs and such reasonable attorney’s fees as may be allowed by the court . . 

To recover double damages, although not mentioned in the statute, courts require a finding of bad faith, arbitrariness, and unreasonableness by the employer.  In Saunders’ case, he won because the trial court found that the failure to pay was willful.  What might seem strange about the case is that Saunders was not only an employee, but he was also a 49% stockholder and an officer in the company he sued to obtain double damages.  Firtel was a 51% owner, and the President. 

Dan Schwartz’s Employment Law Blog has a nice summary of the supreme court’s treatment of how Saunders qualified as an employee as well as the implication of the decision on employers.  I tend to agree with Dan that there is no significant impact on employers because if wages are earned, the wages should be paid regardless of the business relationship.

I think the case does highlight important considerations for business partners.  The case demonstrates how a breakdown in the relationship between two business partners can turn into a dispute where one partner effectively ends up in the shoes of the employer subject to wage and hour laws.  This was probably not intended and it is unlikely that Saunders and Firtel viewed themselves as employee and employer.  In fact, they appeared to be nearly equal partners.

The case is also another example of a once successful business partnership ending in arguments over compensation and written agreements.  It further shows that dissolution of a company is another judicial remedy, along with disassociation and expulsion in partnerships, for a company that can no longer operate in a practical manner.