Executives’ Liability for Wages and Hours Violations

August 15th, 2013 | By Jules Halpern Associates | Circuit Court Decisions, Employer Liability, FLSA, Wages and Hours

SECOND CIRCUIT FINDS CEO INDIVIDUALLY LIABLE FOR WAGES AND HOURS VIOLATIONS

Although it is common for owners and officers of organizations to be named individually in wage and hour lawsuits, the Second Circuit in July found New York mayoral candidate John Catsimatidis, CEO of Gristede’s grocery chain, individually liable for $3.5 million of unpaid wages under the Fair Labor Standards Act (FLSA). This decision sends a very clear message to owners and officers in New York that they can be held individually liable for their organization’s FLSA violations if they are found to have a certain level of operational control over their organizations.

In Irizarry v. Catsimatidis, current and former department managers sued Gristede’s along with its CEO Catsimatidis, among other things, for allegedly not receiving overtime compensation because they were misclassified as exempt employees. The parties eventually reached a settlement agreement, but when the company failed to meet its payment obligations, the employees sued Catsimatidis individually as an employer under the FLSA. Catsimatidis defended against this claim by arguing he was a high-level employee who did not make decisions that directly affected employees. The court rejected Catsimatidis’ argument.

On appeal, the Second Circuit ruled that in order to be held individually liable, an owner or an officer must possess control over an organization’s actual operations and directly affect the terms and conditions of an employee’s employment. An owner or an officer of an organization who makes corporate decisions that have nothing to do with the terms and conditions of an employee’s employment, is not an “employer” for purposes of the FLSA.

Although there was no evidence that Catsimatidis was personally responsible for the FLSA violations at issue, the court found him individually liable due to his overall level of operational control at Gristede’s. This was because Catsimatidis was found to have worked in the corporate office daily, developed merchandising concepts, and made hiring and firing decisions for high-level employees who reported directly to him. Furthermore, Catsimatidis was found to have also played a role in the promotion of key employees who in turn created and enforced company policy. He also had overall financial control of the company, including employee compensation.

INFLUENCE MATTERS

In determining whether Catsimatidis was an employer under the FLSA, the court looked to four factors to determine if the “economic reality” supported such a finding. These factors included:

  • Did he have the power to hire and fire employees?
  • Did he supervise and control employee work schedules or conditions of employment?
  • Did he determine the rate and method of payment?
  • Did he maintain employment records?

Although only the first and third factors applied to Catsimatidis, the court took a flexible approach and ultimately found him individually liable as a result of the overall operational control Catsimatidis exercised over the company. Although the company in this case was larger (1,700 employees) than most organizations where an owner or an officer have been found individually liable, the court ultimately decided that the company was not large enough to prevent Catsimatidis from influencing day-to-day management decisions. The court also noted that this was a “close case,” and that the size and nature of a particular organization factor into determining individual liability in cases dealing with FLSA violations.

INDIVIDUAL LIABILITY ON THE RISE

This case stands as an example to owners and officers of organizations to be diligent in complying with wages and hours laws, especially where they possess a similar level of operational control. This point is further supported by a decision coming out of the First Circuit this month. In Manning v. Boston Medical Center Corp., the court decided that the company’s CEO was individually liable because she “was in a position to exert substantial authority over corporate policy relating to employee wages.” In a similar reasoning to Irizarry v. Catsimatidis, the court in Manning determined the CEO had operational control. This is because she was involved in the reduction of jobs and services, had the authority to and made critical decisions regarding company resources and finances. She also repeatedly exercised the authority to establish company-wide policy regarding employment-related matters.

While owners and officers are often very involved in the operations of their organization, they need to be aware that the potential for exposure to individual liability is real.

Jules Halpern Associates LLC

Workplace and Education Law Advisors

Jules Halpern Associates LLC
JULES HALPERN ASSOCIATES LLC is a boutique law firm committed to serving our clients in all facets of their workplace issues. We provide personalized, practical advice that resonates with our clients’ business objectives.
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