FLSA decision puts C-suite executives on guard

The 2nd Circuit holds that a hands-on executive can be held personally responsible as an employer in a suit

As the owner, president and CEO of New York-based grocery chain Gristedes, John Catsimatidis didn’t sit in an office far removed from the day-to-day operations of the approximately 30 stores his company owned. Rather, Catsimatidis, who is also a candidate for mayor of New York, visited all of the company’s locations on a weekly basis to check on how they were being run. He regularly interacted with store managers, made sales strategy decisions, and even got involved with how products were being displayed in the store aisles.

In 2004, a class of department managers sued Gristedes, claiming that they were improperly classified as exempt from overtime pay. Among the defendants named in the suit for back wages was Catsimatidis himself. Catsimatidis’ intimate involvement with the day-to-day operations of the grocery stores he owned ultimately led to his personal assets being on the line in that lawsuit.

In Irizarry v. Catsimatidis, the 2nd Circuit upheld a district court decision finding that Catsimatidis was an “employer” within the meaning of the Fair Labor Standards Act (FLSA) and could be held jointly and severally liable for the department managers’ unpaid wage claims.

“Catsimatidis was not personally responsible for the FLSA violations that led to this lawsuit, but he nonetheless profited from them,” the court wrote. “Catsimatidis’ actions and responsibilities—particularly as demonstrated by his active exercise of overall control over the company, his ultimate responsibility for the plaintiffs’ wages, his supervision of managerial employees, and his actions in individual stores—demonstrate that he was an ‘employer’ for purposes of the FLSA.”

Broad Definition

The FLSA has broad, and somewhat circular, definitions of “employer” and “employ.” An employer is defined as “any person acting directly or indirectly in the interest of an employer in relation to an employee” and “employ” is defined as “to suffer or permit to work.” Courts have interpreted these terms broadly to encompass as many potentially responsible parties as possible.

“The core issue is who has the power to ensure compliance with the Act,” says Tsedeye Gebreselassie, a staff attorney with the National Employment Law Project. Gebreselassie wrote an amicus brief urging the court to find that Catsimatidis was an employer. “The statute’s definition is incredibly broad.”

In determining whether a company executive should be considered an employer, courts have taken a number of factors into account, including whether the individual had authority to hire and fire employees—to set their pay, hours and conditions of employment—and to keep records. It’s unusual for a CEO to be held liable under the act because most top executives do not exercise direct managerial authority over employees.

“The 2nd Circuit said the mere fact that a person has managerial status does not automatically give rise to liability,” says Christopher Kaczmarek, a shareholder at Littler Mendelson. “However, the court found that this particular CEO could be held liable because he was active at the store level.”

Fairness Factor

Underpinning the 2nd Circuit’s decision in Irizarry was another factor that is not necessarily a feature of the FLSA itself. The plaintiffs’ motion seeking a court ruling that Catsimatidis was an employer within the meaning of the FLSA arose under unusual circumstances. Gristedes had already agreed to settle the plaintiffs’ claims and committed to making certain payments. A feature of that settlement agreement was that if the corporate defendants defaulted, the parties would go forward with a summary judgment motion aimed at settling the disputed question of whether Catsimatidis could be held personally liable.

Sure enough, Gristedes defaulted on the payments and the plaintiffs moved for summary judgment on the question of Catsimatidis’ status as an employer. If Catsimatidis wasn’t on the hook, the aggrieved plaintiffs likely would never get their money.

“Many low-wage workers work for undercapitalized small businesses,” Gebreselassie says. “Even if they win their claims they may get nothing. Courts will ensure, if they can, that the employees can collect.”

While many plaintiffs already name executives as defendants in FLSA lawsuits, Irizarry is now another powerful arrow in their quiver. For a company seeking to shield its C-suite from personal liability in potential FLSA claims, there’s no failsafe approach.

“Maintain traditional lines of managerial authority,” Kaczmarek advises. “Delegate authority to the lower-levels.”

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