COVID-19 is no excuse to avoid paying back wages

The Gym at Greenwich, LLC, The Gym at Porter Chester, Inc., and The Gym at Union Square, Inc. (collectively the “Gyms”) are commonly owned fitness facilities. On December 27, 2018, the Gyms were sued by 40 employees in New York federal court. The employees alleged that the defendants violated the federal Fair Labor Standards Act and the New York labor law by failing to pay wages on time.

The parties reached a settlement Sept. 9, 2019. The Gyms agreed to pay $300,000 25 months; however, if they defaulted, they would have to pay $1 million.

On April 29, 2020, the plaintiffs filed a motion with the court asserting that although the Gyms had paid $76,086, they defaulted under the settlement agreement by not paying back wages of the owed amounts. The Gyms responded with sworn declarations from the owners complaining about their bleak financial conditions and asking the court to excuse their non-performance. The Gyms tried to use the contract law defense of “impossibility of performance,” arguing that since New York’s COVID-19 order closed their businesses, they lacked the funds to perform under the settlement agreement. 

The court observed that the defense of impossibility only applies when performance under a contract (here, the settlement agreement) is objectively impossible. The court ruled that despite the unforeseen pandemic and executive order, the Gyms had at best shown financial hardship, which did not fit the “impossibility of performance” defense. The Gyms were liable for an additional $923,913 in back wages. Lantino v. Clay LLC, No. 1:18-CV-12247 (SDA), 2020 WL 2239957, at *1 (S.D.N.Y. May 8, 2020).

IMPACT: The COVID-19 pandemic has been challenging for employers, and unfortunately the challenges will likely continue. However, employers should not rely on these unforeseen circumstances as an excuse for failing to meet contractual obligations such as back wages.