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Hofstra Labor & Employment Law Journal

Authors

Hina B. Shah

Abstract

There was a significant period in early American history where unlimited liability coexisted with limited liability and certain industries or creditors received more favorable treatment. Limited liability was originally conceived as an extraordinary privilege granted to a select few. In the Twentieth Century, it has been transformed into the default rule for all corporations and entities. The prevalence of limited liability in modern times has undermined fundamental labor protections guaranteeing workers’ their wages. The tension between the limited liability rule and labor rights is fundamentally about who the law favors. Limited liability is risk allocation – shifting to the creditors and thus the public the costs of risks undertaken by corporations. Low-wage workers are at a fundamental disadvantage in the limited liability regime. Structurally, the individual wage earner – the wage creditor – does not have bargaining rights equal to the employer and cannot negotiate a bargain that takes into account the cost of corporate risks. When corporations fail, as they are increasingly doing today, workers are left without any recourse to recover their unpaid wages from shareholders, officers and/or agents. Current exceptions to the limited liability rule fall far short of providing a meaningful remedy to workers. This article calls for a simpler and more effective mechanism to recover unpaid wages – a guarantor system. It will create a strict liability system, whereby shareholders and corporate actors will be liable for their own workers as well as their contractors’ workers’ wages. A guarantee system will fundamentally alter the inequity between low-wage workers and corporate interests.

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