Business owners are well-advised to organize their businesses using one of the legal forms that provides for limited liability protection. These forms include the Limited Liability Company (“LLC”) , the Limited Liability Partnership (“LLP”), and the Corporation. The advantage of incorporating a business in this manner is that the owners and officers will generally be protected from liability if the business is sued. For example, if a customer slips and falls in the premises of a business set up as a LLC, then, in most cases, the owner will not be responsible for having to pay a judgment out of personal funds.
There are, however, several ways around the shield of limited liability protection. For example, one method is the doctrine of “piercing the corporate veil.” The best steps for business owners to avoid application of this doctrine are to observe corporate formalities, to keep the business adequately capitalized, to avoid mingling business and personal funds, and to operate the business as a separate entity from its owners. A lesser known, but critically important exception to the shield of limited liability is found in the Fair Labor Standards Act (“FLSA”).
Remarkably, the FLSA simply eliminates limited liability protection for most small business owners. Under the FLSA, a small business owner who actively participates in the day-to-day operations of his or her business will almost always be individually liable for violations of the statute’s minimum wage, overtime, and anti-retaliation provisions. This astonishing principle is a result of the FLSA’s extremely broad definition of the term “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. § 203(d). By this stroke of the pen, courts have determined that Congress intended to disregard “the shield from personal liability which is one of the major purposes of doing business in a corporate form.” Donovan v. Agnew, 712 F.2d 1509, 1513 (1st Cir. 1983). Consequently, “[t]he overwhelming weight of authority is that a corporate officer with operational control . . . is an employer along with the corporation, jointly and severally liable under the FLSA for unpaid wages.” Id. at 1511.
As a practical matter, there is little that a business owner can do to avoid personal liability for violations of the FLSA. The only way to avoid such liability would be to take an extremely hands-off role in running the business, but this would require someone else to fill the owner’s place. Unfortunately, the delegate would almost certainly assume the owner’s personal liability because the law only requires operational control, not ownership. Therefore, it is not surprising when commentators state that “in almost every case at least one individual can be found to be an employer within the meaning of the FLSA.” 1 Wage and Hour Law § 3:33.
As a result of the added risk of personal liability for violations of the overtime and minimum wage laws, Mays & Kerr works with business owners to take a proactive approach. Businesses should address FLSA compliance early in their life cycles, train key personnel in identifying common compliance problems, stay abreast of current developments in the law, and maintain up-to-date documents and records so that compliance can be proven if litigation does arise.