California Legislature Adds New Penalties For "Willful" Misclassification As Independent Contractors

Posted on September 26, 2011 by Noel Tripp

California, like several other states including Massachusetts and New York, has historically been harsh on employers which abuse the independent contractor designation, classifying individuals who are integrated into their business and function as employees as contractors for the purposes of avoiding tax and wage costs. In fact, Federal Express’ now decade-long battle with courts and agencies over its classification of drivers as independent contractors originates in part from the California state appellate decision in Estrada v. Fedex Ground Package System, Inc., 154 Cal. App. 4th 1 (2007). Now, the California legislature has added a new measure which, barring an unlikely veto, expands misclassification liability further.

Senate Bill 459, passed on September 8, 2011, would make it unlawful for any “person” to willfully misclassify an individual as an independent contractor—not just for a statutory “employer” to do so. This raises the specter of individual liability for misclassifications under the new law. The bill also imposes a penalty of $5,000 to $15,000 for each violation, with escalators to the $10,000 to $25,000 range based on the finding that a given person or company has engaged in a “pattern or practice” of violation. The law also provides that anyone found in violation must post a notice to employees and the public regarding the violation, potentially creating a “ripple effect” for further claims. 

Violations of 459 are predicated on “willful misclassification”, which is defined as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” This broad language, with the conjunctive requirements of voluntariness and knowledge, will create ambiguities (and of course litigation) in the wake of the law’s passage as to interpretation of this definition.

The difficult and expensive wage-and-hour compliance environment in California is not news. However, this new enactment, once it receives the likely approval of Governor Brown, would expand exposure both in terms of potentially liable parties (i.e., individuals) and the costs of misclassification. Any entity or individual conducting business in the State of California which has not yet analyzed its classification of workers as contractors is well advised to do so now.

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New York Federal Court Finds Corporate CEO Individually Liable For Unpaid Wages

Posted on September 16, 2011 by Noel Tripp

In the latest installment in a long running dispute regarding compensation of certain mid-level managerial employees at the Gristede’s chain of New York-area grocery stores, federal Judge Paul Crotty ruled last week that Gristede’s corporate CEO, John Catsimatidis, is an individually liable “employer” under the FLSA and New York Labor Law. Torres, et al. v. Gristede’s Operating Corp., et al., 04-CV-3316 (S.D.N.Y. Sept. 9, 2011).  

The Gristede’s litigation, settled on the eve of trial in 2009 but has persisted due to the corporate defendants’ failure to adhere to the payment schedule set forth in the settlement agreement. As the suit was initially filed against numerous corporate defendants and individuals, including Mr. Catsimatidis, the CEO of the operative corporation, Plaintiffs’ counsel renewed its motion to hold Mr. Catsimatidis individually liable when the payment scheduled was not adhered to.  In finding that Mr. Catsimatidis met the test for an “employer” as an individual under the FLSA’s “economic realities” test and the Second Circuit’s decision in Herman v. RSR Sec. Services Ltd., 172 F.3d 132 (2d Cir. 1999), Judge Crotty relied on undisputed evidence regarding his individual control and involvement in the management of the business, as well as on an affidavit submitted by Mr. Catsimatidis in an unrelated litigation attesting to his operational control of the company as CEO. 

Consistent with the FLSA’s broad, remedial purpose, courts have fashioned tests which seek to hold individuals liable for wages as employers (even without application of the corporate veil doctrine) where they exercise sufficient control and have sufficient authority to warrant imposition of such personal liability. As the Torres decision demonstrates, management of small, medium and large businesses (along with their employment and corporate governance counsel) must be aware of this potential liability, and take steps to ensure wage and hour compliance and minimization of personal risk.

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There Is No Personal Liability For Wage and Hour Violations: Is There?

Posted on May 5, 2010 by Noel Tripp

Business owners, supervisors and managers performing services for corporate entities often believe that liability for wage and hour violations can be imposed solely on the incorporated entity.  To the contrary, as demonstrated by a recent New York Federal Court decision, various theories support individual liability under both federal and, in this case, New York State law.

In Flannigan v. Vulcan Power Group, L.L.C., 2010 U.S. Dist. LEXIS 41751 at * 10-13 (S.D.N.Y. Apr. 27, 2010), Judge Barbara Jones considered a motion to dismiss wage and hour claims brought against an officer/manager.In denying the motion, the court explained that corporate officers and principal shareholders, as well as supervisors and managers involved in wage and hour policymaking/decision-making, can be personally liable for unpaid wages under federal and state law.  Id. The Court cited Plaintiff’s allegations and documentary evidence to the effect that the individual defendant had met with her regarding the terms of her employment, and subsequently communicated with her about the status of her commission compensation, as sufficient to allege individual liability under the FLSA and New York law. Id. The court did however find that individual liability could not be imposed on the corporate shareholders under Section 630 of the New York Business Corporation Law because the defendant corporation was not incorporated in New York. Id.  Under BCL § 630, the ten largest shareholders of a closely held New York corporation are liable for unpaid wages and benefits.

Business owners (as well as supervisors and managers involved in wage and hour policymaking/decision-making) must recognize the various theories under which they can be subject to personal liability and of course take actions to minimize such potential liabilities. 

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