Fair Labor Standards Act

The United States Court of Appeals Second Circuit issued a significant decision with respect to individual liability of corporate officers and employees under the Fair Labor Standards Act (“FLSA”).  In Irizarry v. Castimedes, (Torres v. Gristede’s Operating Corp.) the Court found that an individual owner of a corporation may be held to be an employer under the FLSA, and thus individually liable for wage and hour violations.
 
An employer who violates the FLSA minimum wage and overtime regulations is liable for the employee or employees’ unpaid wages, an additional equal amount as liquidated damages and the employee plaintiffs’ attorneys’ fees.  The FLSA is a fee-shifting statute that dictates that the successful Plaintiff’s attorneys’ fee be paid by the defendants.  This decision has significant impact on the issue of recovery of allowable attorneys’ fees and on the question of who is an employer? 

On the issue of attorneys’ fees, the Court noted that the purpose of fee-shifting statutes is to grant attorneys’ fees that may be disproportionate to the plaintiffs’ recovery in an effort to incentivize lawyers to represent civil rights plaintiffs in claims that may have a modest cash value.  An employer facing lawsuits for wage and hour violations face substantial financial exposure, both on the corporate level and on the individual level.   Different levels of managerial employees may face responsibility for these amounts owed pursuant to the FLSA.
 
Another question before the Court in the Gristede’s case was whether an individual owner could be determined to be an “employer” even though he did not exercise control over day-to-day operations and have direct control over the employment conditions of the employee-plaintiffs.  The Second Circuit found the Chairman and CEO of the Gristede’s Supermarket chain to be an “employer” under the FLSA and thus liable for FLSA violations committed by the corporation.  The Court found that the CEO was individually liable notwithstanding the fact that he had very little, if any, direct control or responsibility with respect to the specific employees at issue; he was not personally aware of any of the FLSA violations by the company; nor familiar with the payroll practices and schedules of the employees.  The Court reasoned that “[a]n employer need not look over his workers’ shoulders every day in order to exercise control.”

The factors that the Court cited in support of its decision were:

• the exercise of “general operational and management control” over the company;
• involvement in hiring, promoting, and in some cases firing certain management employees – including the payroll and human resource employee roles; and
• the exercise of general control over the finances of the enterprise.

In the Gristedes case, given the overall management and operational control that the CEO exercised and the specific control he had over key managerial employees, albeit indirectly and  through employees that reported to him, he was an “employer” under the FLSA.   The Court identified and reaffirmed the factors to determine whether an individual is an employer under FLSA.  The general standard that the Court announced focuses on the “economic reality” of the relationship but includes a “totality of circumstances” review. 

The specific factors of the “economic reality” test include:  Did the alleged individual have the power to

1. hire and fire employees;
2. supervise or control employees’ work schedules or conditions of employment;
3. determine the rate or method of payment; and
4. maintain employment records. 

In other words, before an individual can be held to be an employer, he or she must have acted in an immediate and direct way over the workers in question.   The “totality of circumstances” analysis involves an evaluation of several factors none of which is dispositive, but all of which must be looked at in order to find an individual as an employer.  Overall, the Court summarized the test as requiring a sufficient level of “operational control” over the company’s employment of employees.  Control over the employer/employee employment relationship is required, however, such control need not be “direct control”.  Operational control exercised or potentially exercised by the individual over the management, including supervision of management, and over the affairs of the company, including both general oversight management issues and financial control of the company is important in the context of evaluating whether the individual is an employer under the FLSA.

The word “employer” is defined broadly to include “any person acting directly or indirectly in the interest of an employer in relation to any employee.”  “Person” includes an individual, so that individuals may be held liable or responsible for violations of the law by a corporate employer.  The traditional requirements for piercing the corporate veil are not required to establish individual liability under the FLSA.   In this instance, the evidence showed that the CEO was involved in many general business decisions, he exercised significant financial control of the company, was involved in the hiring, promoting, and in some cases, firing of the senior management employees and had ultimate decision making authority to determine the future of the company. 
 
The take-away from this case is that company executives directly responsible for determining the terms and conditions of employment are deemed employers and company executives responsible for the general overall management and financial control of the company are also potential “employers” under the FLSA.  Anyone deemed an “employer” may have individual liability for wage and hour violations under the FLSA.