Can a company officer be personally liable for wage and hour violations?

Article courtesy of SBAM Approved Partner ASE

By Michael J. Burns

Typically an organization takes the hit for violations under wage and hour law. But on rare occasions a court may hold that the “employer” is an actual person. In the case of Irizarry v.Catsimatidis the company CEO was held personally liable for the misclassification of employees as exempt. What caused this ruling?

The misclassified employees sued the company and three of its officers as a class. The lower court held that the company (employer) did in fact violate the Fair Labor Standards Act (FLSA) in several ways and awarded judgment in favor of the plaintiffs (employees). Subsequently the employer (a chain of grocery stores) reneged on the award settlement. The employees moved for summary judgment against the grocery chain’s owner, chairman and CEO as personally liable for the judgment.

The Defendant CEO argued that he only made symbolic and general decisions that did not impact the plaintiffs and therefore could not be their direct employer. The lower court once again ruled in favor of the employees.  On appeal the U.S. Second Circuit Court of Appeals extensively reviewed what an employer was under the FLSA.  In its jurisdiction that covers New York and several surrounding states, who or what is an employer under the FLSA was always defined quite broadly. The court used the economic reality test that looks at four factors in the establishment of an employment relationship, that reads: “whether the alleged employer, 1.)   the power to hire and fire the employees; 2.) supervised and controlled employee work schedules or conditions of employment; 3.) determined the rate and method of payment and 4.) maintained employment records.”

How did the Court use this general guideline of what an employer is, to establish that it includes individuals within the employer?

The answer to this involves two questions. First, what is the scope of an individual’s authority or “operational control” over a company?  At what level of a corporate hierarchy, and in what relationship with plaintiff employees, must an individual possess power in order to be covered by the FLSA? The second inquiry, related but distinct, concerns hypothetical versus actual power. To what extent must an individual actually use the power he or she possesses over employees to be considered an employer?

To the first question the court found the other circuit courts looking at this issue have acknowledged that a company owner, president or stockholder must have at least some degree of involvement in the way the company interacts with employees in order to be a FLSA “employer.”  The court held that “a person exercises operational control over employees if his or her role within the company, and the decisions it entails, directly affect the nature or conditions of the employees’ employment.”

The second question looked at whether the defendant CEO had the actual power. Ownership alone is not sufficient under the FLSA’s definition of employer. If the individual is to be the employer s/he must have some involvement with the company’s employment of employees.  To answer this question the court looked at the relationship the CEO had with the day-to-day operations of the company and found that he was regularly on the premises of the company, interacting with his subordinates on a myriad of issues and problems. He also regularly visited the stores in his chain, offering suggestions and directions to managers and greeting employees.  At the same time, his authority to hire and fire was in a practical way limited to four or five of his officers.

The Court took a “totality of circumstances” approach to finding that the CEO did meet the necessary criteria of the economic reality test to be considered the employer under the FLSA. His “active exercise of overall control over the company, his ultimate responsibility for the plaintiffs’ wages, his supervision of management employees, and his actions in individual stores demonstrate that he was an “employer”  for purposes of the FLSA.

Human Resource professionals struggling with getting certain management personnel to understand the importance of wage and hour compliance issues might use this case to show that individuals can be held liable for judgments, not just the employing company.