Can an executive be found personally liable for a company’s failure to pay minimum wages and overtime?
Yes. Unlike other debts owed by a company, unpaid minimum wages and overtime can often be recovered from certain high-level company officials as well as from the company. As the U.S. Court of Appeals for the Second Circuit recently ruled, the Fair Labor Standards Act (FLSA) defines the term “employer” based on “economic realities” to include not only the offending company but also high-level managers who determine how the business treats its employees. See Irizarry v. Catsimatidis, 2nd Cir., No. 11-4035 (July 9, 2013).
In the Irizarry case, the Second Circuit applied the following four-factor test to decide whether or not to hold personally liable a chairman/president/CEO of a grocery store chain for unpaid overtime owed to the chain’s employees. The test considered whether the chairman:
- had the power to hire and fire the employees,
- supervised and controlled employees’ work schedules or conditions of employment,
- determined the rate and method of payment, and
- maintained employment records.
Using these factors, the court determined that the chairman had the authority to hire and fire employees, set employee schedules, and determine working conditions, although he seldom exercised this authority. The chairman did exercise control over the employees’ rates of pay, but did not maintain employment records. Instead, the records were kept in his office by the payroll director.
While this made for a “close case” because only the first and third factors of the test were satisfied, the Second Circuit noted that the chairman was essentially the “one person who is in charge of the corporate defendant.” Because the purpose of the FLSA is not to punish an employer but to compensate aggrieved employees, the Court found that the statute’s purpose weighed in favor of finding that the chairman was the plaintiffs’ employer under the FLSA. It held the chairman personally liable for the unpaid overtime owed to the employees.
As this decision shows, executives with authority over personnel and payroll practices should use this authority to make sure that their companies pay all minimum wages and overtime due to employees. Otherwise, such executives could be forced to pay these amounts, plus liquidated damages and attorneys’ fees, to the employees from their personal assets.