In the first Federal appellate decision to address the issue head on, the U.S. Court of Appeals for the Fifth Circuit last week held that an individual is not personally liable as an “employer” under the Fair Labor Standards Act (FLSA) merely by their status as an LLC member. The plaintiff was a bartender at a bar owned by Pasha Entertainment Group, LLC, and alleged that he was not paid an hourly wage in violation of the FLSA. The LLC being out of business, the plaintiff sued the defendant, a member of the LLC, in his individual capacity. If an individual has exerted “actual operational control,” that individual can be personally liable for FLSA violations committed by a company.
The District Court for the Southern District of Texas granted summary judgment in favor of the defendant, and the Fifth Circuit affirmed. The Fifth Circuit applied the “economic reality” test to determine whether the defendant had operational control. This involves examining the hiring, firing, supervisory, and payment powers the defendant specifically exercised. Because the defendant did not hire the plaintiff, did not sign the plaintiff’s checks, and did not supervise the plaintiff’s day-to-day work, as a matter of economic reality, no control existed. Accordingly, the Fifth Circuit refused to impose liability on the member of the LLC. The court explained: “We decline to adopt a rule that would potentially impose individual liability on all shareholders, members and officers of entities that are employers under the FLSA based on their position rather than the economic reality of their involvement in the company.”
Gray v. Powers, No. 10-20808 (5th Cir. Feb. 29, 2012).