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Heads Up for CEOs and Others – Personal Liability for Overtime Violations

Posted on July 29, 2013 in HR Insights for Health Care

Written by: Stephen W. Lyman

It doesn’t happen often but when it does it can be a very big deal – personally.  Because of how the term “employer” is broadly defined by the Fair Labor Standards Act (“FLSA”) (which deals with wages, hours and overtime), it has long been possible for a manager to be considered an “employer” and therefore be personally liable for wage and hour violations.  There have been a few cases where courts have assigned personal liability to the managers who were actually responsible for the violations.  But now a federal appeals court has held that personal liability can go all the way up the chain of command to the Chief Executive Officer of a very large company.  This may be a signal to plaintiffs to name the CEO and other high level executives in their claims for unpaid wages and overtime.  

The All Powerful CEO

In this class action case, the court assigned personal liability to the individual who was the Chairman of the Board, President and CEO of a food chain in New York that consisted of 35 stores and employed over 1,700 employees.  This CEO hired managerial employees, signed all class member paychecks, had the power to close or sell stores, routinely reviewed financial reports, worked from his office at the corporate headquarters and generally presided over the day-to-day operations of the company. According to the district court below, for the purposes of applying the total circumstances test, it does not matter that the CEO has delegated powers to others.  Instead what is critical is that the CEO has those powers to delegate. The lower court concluded that there is no area of the company’s operations that is not subject to the CEO’s control, whether or not he chooses to exercise it, and that, therefore, the CEO had operational control and, as such, may be held to be an employer.

Economic Reality and Operational Control Is the Key

The federal appeals court agreed and pointed to four factors to determine the “economic reality” of an employment relationship.  A court will consider whether the alleged employer (1) had 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.  Not all factors need to be present to find personal liability.  Operational control is at the heart of the analysis.

The CEO’s core argument was that he was a high-level employee who made symbolic or, at most, general corporate decisions that only affected the lives of the plaintiffs through an attenuated chain of causation. Although the CEO undisputedly possessed broad control over corporate strategy, including the power to decide to take the company public, to open stores and to carry certain types of merchandise, the CEO contended that a FLSA “employer” must exercise decision-making in a “day-to-day” capacity.  His arguments did not convince the court.

The court noted that “operational control” need not be exercised constantly for an individual to be liable under the FLSA.   Employer status does not require continuous monitoring of employees, looking over their shoulders at all times, or any sort of absolute control of one’s employees. Control may be restricted, or exercised only occasionally, without removing the employment relationship from the protections of the FLSA, since such limitations on control do not diminish the significance of its existence.

The Lessons for Employers…and CEOs

In this case the personal liability of the CEO became an issue only after his company reneged on a settlement with the class that had been certified by the court.  Hence, the plaintiff’s search for a deep pocket.  The fact that a CEO of a very large company was found to be personally liable by a federal court of appeals is significant.  This recent holding that focuses on the personal liability of the highest level of management may plant the seed for plaintiffs suing under the FLSA (and under the FMLA – the definitions of “employer” are the same) to name high level executives as individual defendants.  As a litigation tactic, this could be effective in focusing the personal attention of the named CEO – and other management officials – on potential personal exposure in the hope of reaching an early settlement.

Bottom line, high level management should take care to ensure that those who are delegated the responsibility to control wage, hour, overtime and FMLA functions know what they are doing and that they are doing it right.

Reference: Irizarry v. Catsimatidis, (2nd Cir., Docket No. 11-4035-cv, July 9, 2013)

If you have any questions please contact Steve Lyman at slyman@wp.hallrender.com or your regular Hall Render attorney.