Can Individuals Be Personally Liable Under the Fair Labor Standards Act (FLSA)?

Boss Over Shoulder

A recent decision by the Massachusetts appeals court may open the door to personal liability in FLSA claims—at least in the kinds of systematic under-compensation cases sweeping through American hospitals.

In this case, current and former employees alleged that they were deprived of their wages due to timekeeping policies and workplace practices that required them to work through their meal and rest periods, put in extra work before and after their regularly scheduled shifts, and attend mandatory training sessions. They asserted causes of action under the Fair Labor Standards Act (FLSA) and Massachusetts common law for recovery of their unpaid wages. Their charges were dismissed before they were reexamined by an appeals court.

Numerous lawsuits like this have been filed against hospitals across the country, all alleging similar types of systematic under-compensation, (dubbed “hospital compensation cases”). In fact, as the judge observed, a number of these cases were being litigated by counsel for plaintiffs in this case.

On appeal, the court overturned the lower court’s dismissal of the FLSA claims against the employer and one of the individual defendants, while allowing the charges to be dropped against the remaining individual defendant.

Importantly, claims were allowed to stand against the employer’s former president and chief executive officer, while they were dropped as to the former senior human resources director.

What the Employees Said

The plaintiffs alleged that:

  • Their employer and supervisors were aware that they performed work without being paid.
  • Their unpaid work was performed on premises during operational hours, in clear view of managers and supervisors.
  • Due to staffing shortages and other industry demands, management knew that the tasks they assigned required employees to work through their meal breaks and before and after their regularly scheduled shifts.
  • They also suggested that their employer consciously took advantage of the employees’ dedication and commitment, knowing that they would not abandon their responsibilities simply because their work hours are over or because they are due to take a meal or rest break.

What the Law Says

Liability under the FLSA attaches to any “employer,” broadly defined to include “any person acting directly or indirectly in the interest of an employer in relation to an employee.”  Courts have generally agreed that “a corporate officer with operational control of a corporation’s covered enterprise is an employer along with the corporation, jointly and severally liable … for unpaid wages.”

The three basic elements of a FLSA claim are:

  1. The individual plaintiffs were employed by the defendant
  2. The work involved interstate activity
  3. The employee plaintiffs performed work for which they were under-compensated

Claims for unpaid overtime wages must establish that the workers were employed and that any hours worked in excess of 40 per week were not compensated at a rate of at least one and one-half times the regular rate.

Personal Liability When We See It

In the seminal case on FLSA individual liability, the courts balanced “the shield from personal liability [that] is one of the major purposes of doing business in a corporate form” against Congress’s clear refusal “to incorporate the common law parameters of the employer-employee relationship” into the FLSA.

Clear as mud? Looking to the U.S. Supreme Court’s precedents interpreting employment statutes, this court applied an “economic reality” test that looked to the totality of the individual’s level of involvement with the corporation’s day-to-day operations, as well as their direct participation in creating or adopting the unlawful pay practices.

This court identified some of the key indicia of personal liability under the FLSA:

  1. They typically involve a corporate officer with operational control rather than a mere employee, and/or
  2. The individual possesses an ownership stake (seen as highly probative of an individual’s employer status).1

Applying the Law to the Facts

In the Massachusetts case, the court considered that, while the former president and CEO did not have an ownership interest in the organization, she was alleged to make decisions concerned the timekeeping policies complained of, oversaw the budget, and made a number of major employment-related decisions, including reducing jobs and implementing budget cuts. Concluding that while one’s high position within an organization wasn’t alone sufficient to hold the individually personally liable under the FLSA, the court noted that the complaint contains allegations indicating that she had control over corporate policy about compensation practices.

The court believed that the former president and CEO had control over the budget and critical resource allocation including the reduction of jobs and services – this was sufficient for the appeals court to allow the claims against her to stand.2

When it came to the former senior human resources director, the court noted that while he, too, didn’t have an ownership interest in the organization, he was not a high-level corporate officer and the complaint didn’t contain any specific allegations to support the inference that he had control over the allocation of financial resources.

The court here concluded that all that is necessary to permit the case against an individual to continue past the pleading stage, is that the complainant plausibly allege that an individual defendant controlled the corporation’s financial affairs and caused the organization to compensate (or not to compensate) employees in accordance with the FLSA. It’s for a trial to determine whether or not sufficient to find personally liability for such individuals.

Impact

Due to the fact that there are similar cases being tried in multiple courts, this case is likely to get some attention. Its broad reading of when an individual may be personally liable under the FLSA is bound to raise some eyebrows – and concern.

 


1 Noting that when an individual has the ability to have the employer undercompensate employees, thereby increasing profits of the organization, which then inure to the individual – they have a strong personal motive to cause violation the FLSA minimum wage standards.

2 There was a dissenting opinion disagreed: stating that while it was possible that mere broad assertions that the former president and CEO had authority that might include the necessary degree of control over the plaintiffs’ employment, these don’t amount to a reasonable expectation that further discovery and trial will reveal evidence of liability.

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
Categories: Executive Risk, Health and Group Benefits | Tags: ,

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