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Don’t Get Into Hot Water: How to Avoid Liability Under the FLSA

While restaurants are facing more and more lawsuits filed by employees under the Fair Labor Standards Act (“FLSA”), the number of lawsuits filed against individuals, such as officers, managers, supervisors, and shareholders of restaurants, whom employees claim are also their employers, are increasing in frequency as well.

What is individual liability?
Under the FLSA, an “employer” is “any person acting directly or indirectly in the interest of an employer in relation to an employee.” Courts usually apply an “economic realities” test to determine if an individual is an employer. Relevant factors under the “economic realities” test include whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules and conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.

When is a person individually liable?
The individual liability of owners, managers, and supervisors of restaurants has become more frequent in the industry in the last few years, especially in Georgia and other surrounding southeastern states. For example, in October 2011, a federal district court judge in Georgia determined that the sole shareholder and president of a restaurant was individually liable for a cook’s damages. The court found that the shareholder and president had operational control over the restaurant, including the ability to hire, fire, discipline, and control its employees; she acted on behalf of the restaurant as to the cook’s compensation; she made the decision to not pay the cook at time and one half his regular rate for time worked in excess of forty hours; she was aware that the FLSA required that the cook be paid an overtime premium; and she actively engaged in a scheme to circumvent the FLSA by keeping two separate methods of recording work time.

Similarly, in late January of 2013, a federal district court in Florida found that the president of a restaurant, who had active involvement in its day-to-day operations, was jointly and severally liable for damages under the FLSA because he possessed sufficient control over the terms and conditions of the employees’ employment to be held individually liable. Specifically, the court found that he hired and fired employees, trained employees, controlled employee work schedules, kept pay records, and handled payroll issues.

Individual liability has also been an issue in the restaurant industry throughout the rest of the country. In late 2013, former employees of an Illinois restaurant sued the restaurant and its general manager for minimum wage and overtime compensation violations in federal court. The general manager asked the court to dismiss the claim against her, arguing she was not an “employer” under the FLSA. The court found, however, that the general manager interviewed job applicants; overruled other managers’ decisions; told one employee that she would pay the back wages; offered to pay another employee higher wages if the employee did not quit; prepared payroll checks for some employees; and oversaw aspects of the restaurant’s financial transactions and accounting. Based on these allegations, the court found a significant factual issue as to whether the general manager was legally responsible, at least in part, for the alleged FLSA violations.

In early 2014, former restaurant employees brought an action in a New York federal court alleging minimum wage, overtime, and tipping claims under the FLSA against a restaurant, two managers, and a member of the restaurant operator’s board of directors. The court found that there were questions of fact as to whether the board member was an “employer” where there was evidence that he attended and supervised pre-shift meetings, held mandatory meetings for the employees, and changed the employees’ schedules. Notably, the restaurant did not even contest the employees’ allegation that the two managers were “employers” under the FLSA.

When is a person not individually liable?
Not every person associated with a restaurant is found individually liable under the FLSA. In the first Federal appellate decision to address the issue head on, the U.S. Court of Appeals for the Fifth Circuit held that a person is not individually liable as an “employer” under the FLSA merely by his or her status as a limited liability company (“LLC”) member. In early 2012, a bartender at a bar owned by an LLC alleged that he was not paid an hourly wage in violation of the FLSA. The LLC being out of business, the bartender sued a member of the LLC, in his individual capacity. The court applied the “economic realities” test and determined that the LLC member did not have operational control, as there was no evidence that he hired the bartender, signed the bartender’s checks, or supervised the bartender’s day-to-day work.

How does a person avoid individual liability?
Pursuit of individuals in FLSA cases is a growing trend in this economy because often the restaurant being sued is on the verge of closing due to insolvency and more money is available from individuals than the restaurant itself. Also, employees and their lawyers know that suing individuals, such as the owner, manager, or an LLC member, exerts more pressure on the restaurant to settle the case.

To avoid being classified as an “employer” under the FLSA, passive investors of a restaurant should avoid having any real control over the employees’ day-to-day work, such as hiring, firing, supervisory, or payment powers. If an individual is determined to be an “employer,” it is important that he or she knows, and follows, federal and state wage and hour laws. They should review the restaurant’s payroll practices and job classifications to ensure that employees are classified properly. In addition, they should receive training and should be advised that they should not retaliate out of frustration if an employee does file an FLSA action. An audit on the restaurant should also be conducted to ensure that all individuals, including supervisors and managers, are following established procedures and are tracking employees’ hours properly.

Courts’ expanding views of the scope of FLSA liability mean that more people in the restaurant industry have a practical obligation to know, understand, and abide by FLSA regulations than ever before. In recognition of this new legal reality, restaurant owners, managers, and anyone else acting in such a way that he or she is an “employer” as defined by the FLSA should regularly attend FLSA training programs or seek the advice of employment attorneys who can educate them on their evolving, individual duties under the FLSA in the workplace.

As appearing in the Georgia Restaurant Association’s Legal Knowledge Center