In a recent decision, the US District Court for the Southern District of New York held that the president and CEO of a New York area grocery chain is individually liable to employees for unpaid overtime compensation. This case is an important reminder for executives in retail and other industries that they can be dragged into litigation and face significant personal exposure. Torres, et al. v. Gristede’s Operating Corp., et al., 04-CV-3316 (SDNY Sept. 9, 2011).

Background

This case is a long-standing and hard fought class action for unpaid overtime compensation by a group of mid-level managerial employees. The parties settled the case shortly before trial in 2009, but the case has remained active due to the corporate defendants’ alleged failure to adhere to the settlement agreement’s payment schedule. Plaintiffs’ counsel filed a motion for partial summary judgment seeking to hold John Catsimatidis, the president and CEO and sole owner of Gristede’s, individually liable when the payment scheduled was not followed.

The court held that Mr. Catsimatidis is an “employer” within the meaning of the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL). As such, Mr. Catsimatidis is jointly and severally liable for plaintiffs’ alleged damages.

Analysis

Under both laws, the word “employer” is defined broadly to include “any person acting directly or indirectly in the interest of an employer in relation to any employee.” “Person” includes an individual, so that individuals may be held liable or responsible for violations of the law by a corporate employer. Both parties agreed that the traditional requirements for piercing the corporate veil are not required to establish individual liability under the FLSA and NYLL.

The court summarized passages from an affidavit signed by Mr. Catsimatidis on January 13, 2009 in another case that was pending in the same court: (1) he is the sole owner, president and CEO of Gristede’s and its parent company; (2) he has owned the enterprise for 20 years; (3) he has the right and authority to open, close and reopen stores; (4) he can set prices for goods offered for sale; (5) select the décor for the stores; (6) control any store’s signage and advertising. Indeed, he can run the entire operation where he “made [a] fortune trading in the kind of goods sold in the Red Apple and Gristedes supermarket chains that [he] own[s].”

According to the court, this affidavit, together with Mr. Catsimatidis’ statements in this proceeding that he could shut down the business, declare bankruptcy, as well as provide the personal signature necessary for a bank letter of credit to be issued in favor of Gristede’s, demonstrated that he has absolute control of Gristede’s and all of its operations.

In the Second Circuit, where New York is located, the “economic reality” test under the FLSA requires that for an individual to be personally liable, he or she must:

  1. have the power to hire and fire employees;
  2. supervise and control employee work schedules;
  3. determine the rate and methods of pay; and
  4. maintain employment records. 

In other words, before an individual can be held to be an employer, he or she must have acted in an immediate and direct way over the workers in question.

But in another case the US Court of Appeals for the Second Circuit held that “economic reality” should be based on “all the circumstances ... so as to avoid having the test confined to a narrow legalistic definition.”  Mr. Catsimatidis argued that there must be some connection between what the individual has done (in the exercise of his responsibility) and the wrong alleged in the complaint. He argued that corporate officers should not be liable solely due to their officer status.

However, the court reasoned that “[a]n employer need not look over his workers’ shoulders every day in order to exercise control.” In one case, the individual at issue was held to be an employer because he hired management staff, as opposed to the workers who had FLSA complaints. There was uncontradicted evidence that Mr. Catsimatidis hired managerial employees. In addition, Mr. Catsimatidis signed all paychecks to the class members. Although it was an electronic, and not an actual, signature, the court did not think that distinction was significant.

Mr. Catsimatidis argued that he could not fire anyone. The court reasoned that whether that characterization was true or not, key managerial employees at Gristede’s conceded that Mr. Catsimatidis hired them, and acknowledged his power to close or sell Gristede’s stores. The undisputed evidence showed that Mr. Catsimatidis routinely reviewed financial reports, worked at his office in Gristede’s corporate office and generally presided over the day-to-day operations of the company. His employees recognized that he is in charge. The court held that “[f]or the purposes of applying the total circumstances test, it does not matter that Mr. Catsimatidis has delegated powers to others. What is critical is that Mr. Catsimatidis has those powers to delegate.”

Further, Mr. Catsimatidis admitted that he controls Gristede’s banking and real estate matters. According to the court, “[n]otwithstanding the argument that his control in these two critical areas is not relevant to his status as employer, they are part of ‘the total circumstances’ in analyzing whether Mr. Catsimatidis is in fact an employer.” Where officers and owners have “overall operational control of the corporation, possess an ownership interest in it, control significant functions of the business or determine the employees’ salaries and make hiring decisions,” they may be held to be employers under the FLSA.

Takeaways

Frankly, given the extent of Mr. Catsimatidis’ reported ownership interest and authority, this decision is not surprising. However, courts have found individuals liable for wage-hour violations when they have had no ownership interest in the company and when they have had less authority than the president and CEO had in this case.

In most cases, a company will indemnify and provide a defense for an executive who is personally named in a wage and hour lawsuit. But if for some reason the company doesn’t have the resources to pay back pay, liquidated damages, and/or attorneys’ fees and costs, officers, directors and other executives may be personally liable. This is another reason why it is critically important to audit your payroll practices to make sure employees are appropriately classified as exempt and non-exempt, and that non-exempt employees are properly paid for all hours worked.