Shareholder Rights: Wage And Hour Laws Explained

Wage and hour laws are a complex topic, and their application can vary depending on the specific circumstances and the jurisdiction in question. In the United States, the Fair Labor Standards Act (FLSA) sets the federal minimum wage and overtime pay standards, and it is important to note that these laws only apply to employees, excluding independent contractors. Shareholders, as partial owners of a company, may find themselves in a grey area when it comes to wage and hour laws. While they may not be directly employed by the company, they can exert significant influence on its operations and, in certain cases, may be held personally liable for wage and hour violations. This liability often depends on the level of operational control they have within the company.

Shareholders and minimum wage

When it comes to shareholders, the concept of limited liability usually protects them from personal liability for the company's debts. However, there are exceptions to this principle. In New York, for example, § 630 of the Business Corporation Law makes the 10 largest shareholders of privately held domestic and foreign corporations personally liable for "all debts, wages or salaries" owed to employees. This liability applies regardless of the shareholder's knowledge, control, or fault.

In general, federal and state wage and hour laws apply to employees, not shareholders. However, officers, managers, supervisors, and shareholders who exercise operational control over employees may be held personally liable for wage violations if they meet the definition of "employer" under the FLSA. This definition includes anyone acting directly or indirectly in the interest of an employer in relation to an employee. Shareholders with operational control over employees may be considered "employers" and held liable for back wages, interest, liquidated damages, and attorneys' fees.

Additionally, shareholders should be cautious when offering equity compensation as part of employee compensation packages. While it may seem like a solution for cash-poor startups, equity compensation can violate federal and state wage and hour laws. Under the FLSA, wages must be disbursed in cash, negotiable instruments, or certain employer-furnished facilities, excluding shares of capital stock. Therefore, relying solely on equity compensation to satisfy minimum wage and overtime laws is not advisable.

To summarize, while shareholders are typically shielded from personal liability for a company's debts, including wage violations, there are exceptions. Shareholders with operational control over employees may be considered "employers" and held liable for wage violations. Additionally, equity compensation should be carefully structured to comply with federal and state wage and hour laws.

Shareholders and overtime pay

The Fair Labor Standards Act (FLSA) of 1938 sets out the definition of "employer" as "any person acting directly or indirectly in the interest of an employer in relation to an employee". Under the FLSA, nonexempt employees are entitled to overtime pay for hours worked over 40 in a workweek at a rate not less than time and a half of their regular rates of pay. However, the FLSA does not consider equity as "wages" for minimum wage purposes. It requires that minimum wage and overtime pay must be disbursed in cash, with a negotiable instrument, or in room and board.

Corporate shareholders can be held personally liable for wage and hour violations if they exercised the requisite operational control. However, this varies by jurisdiction. For example, New York is one of the few states to impose wage liability on shareholders. The state makes the 10 largest shareholders of privately held domestic and foreign corporations personally liable for all debts, wages, or salaries owed to employees.

In Israel, the Hours of Work and Rest law does not apply to employees who hold managerial positions or positions requiring a special degree of personal trust, such as directors. Therefore, they are not entitled to overtime pay.

In North Carolina, workplace-controlling supervisors are not offered refuge under the North Carolina Wage and Hour Act, which has a similar definition of "employer" as the FLSA. This means that supervisors with sufficient operational control over working conditions may be held liable for back pay and other remedies provided by the Act.

Shareholder liability for wage violations

In most cases, shareholders are shielded from the debts and liabilities of a corporation. However, there are exceptions to this rule, and shareholders can be held personally liable for wage violations in certain circumstances.

Shareholder Liability and New York Business Corporation Law

The state of New York has always imposed some form of liability against corporate shareholders since the enactment of the first general corporate law in the 1800s. The most recent amendment to this law was made on January 9, 2016, which expanded the scope of liability. Under Section 630 of the New York Business Corporation Law, the top ten largest shareholders, determined by the fair value of their interest, can be held liable for unpaid wages, salaries, overtime, vacation pay, and other forms of compensation owed to employees. This liability applies regardless of whether the shareholder was aware of or responsible for the non-payment of wages.

Federal Law and the Fair Labor Standards Act (FLSA)

Under federal law, the definition of "employer" in the Fair Labor Standards Act of 1938 (FLSA) is broad and includes "any person acting directly or indirectly in the interest of an employer in relation to an employee." This has been interpreted to include corporate officers, managers, supervisors, and shareholders who exercise operational control over employees. In determining employer status, courts apply an "economic reality" test, which examines the individual's financial interest in the workplace, involvement in decisions affecting employment terms and conditions, and relative operational control. Shareholders can be held personally liable for wage violations even if they lack an ownership interest or have a minimal ownership interest.

North Carolina Law and the North Carolina Wage and Hour Act (Act)

The definition of "employer" in the North Carolina Wage and Hour Act (Act) is similar to that of the FLSA. While the Act does not expressly indicate that supervisors can be held personally liable, the North Carolina Department of Labor has made it clear that it will look to federal court decisions interpreting the FLSA for direction in construing the Act. This suggests that supervisors and shareholders with sufficient operational control over working conditions may be liable for wage violations under North Carolina law.

In summary, while shareholders are generally shielded from corporate liabilities, they can be held personally liable for wage violations in certain circumstances, particularly if they exercise operational control over employees or are among the largest shareholders in the corporation.

Shareholders and wage exemptions

The Fair Labor Standards Act (FLSA) of 1938 sets out the definition of an "employer" as "any person acting directly or indirectly in the interest of an employer in relation to an employee". This definition has been interpreted expansively by federal courts, which have ruled that there can be several simultaneous "employers".

The "economic reality" test, adopted by many courts, requires an examination of the purported individual "employer's":

• Financial interest in the workplace
• Involvement in decisions affecting the employee's employment terms, conditions, and compensation
• Relative operational control in the workplace

Shareholder status can be important, but personal liability has been found even against corporate officers and supervisors who lack an ownership interest or whose ownership interest is minimal.

The FLSA requires that most employees in the United States be paid at least the federal minimum wage of $7.25 per hour for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. These exemptions are often referred to as the "white-collar" or "EAP" exemptions.

To qualify for exemption, employees must generally meet certain tests regarding their job duties and be paid on a salary basis of at least $684 per week. Job titles do not determine exempt status. In order for an exemption to apply, an employee's specific job duties and salary must meet all the requirements of the Department's regulations.

The FLSA does not consider equity as "wages" for minimum wage purposes. According to the statute and its regulations, minimum wage and overtime pay must be disbursed:

• In cash
• With a negotiable instrument (i.e. a check)
• In room, board, or similar "facilities" provided by the employer

The term "facilities" excludes "shares of capital stock in an employer company, representing only a contingent proprietary right to participate in profits and losses". Thus, under federal law, wages must be paid free and clear to the employee, without considering the value of any equity compensation.

However, under the FLSA, employers are permitted to exclude the value of or income from stock options or similar rights from the "regular rate of pay" used in calculating overtime, if certain criteria are met. This is known as the "safe harbor" provision, which states that the value of such benefits does not raise an employee's regular hourly rate of pay, which is then used by the employer in figuring overtime.

In summary, while shareholder status can be a factor in determining personal liability for wage and hour violations, it is not the sole determinant. The "economic reality" test considers an individual's financial interest in the workplace, involvement in decisions affecting employment terms and compensation, and relative operational control. Additionally, exemptions from minimum wage and overtime pay requirements exist for certain employee classifications under the FLSA, but these are based on job duties and salary levels rather than shareholder status.

Shareholder status and personal liability

Shareholders of a corporation are generally not liable for the debts or obligations of the corporation, including legal liability for torts or contract actions. This is because corporations are treated as separate legal entities, existing independently from their shareholders and officers. However, there are exceptions to this rule.

Firstly, a shareholder can be held liable for the debts of a corporation if they have agreed to be personally liable. This often occurs when an individual acts as a co-borrower or guarantor of a loan or other extension of credit given to the corporation.

Secondly, a court may decide to "pierce the corporate veil" and impose personal liability on a shareholder for the debts or liabilities of the corporation if it is found that the corporate form is being abused. This can occur when a corporation is found to be a shell entity for an individual's personal business activity, or when there is little distinction between the corporation's business affairs and the shareholder's personal affairs.

Thirdly, under New York law, a corporate officer may be held individually liable for their personal participation in the corporation's affirmative commission of a tortious act.

Fourthly, certain Federal and State statutes provide for personal liability on behalf of shareholders and/or officers for specific obligations of a corporation. For example, New York's Labor Law provides that certain owners or officers may be held personally liable if they knowingly participate in a corporation's failure to pay its workers the prevailing wages and supplements due by law.

Additionally, while not directly related to shareholder status, it is important to note that wage and hour laws, such as the Fair Labor Standards Act (FLSA), can impose personal liability on corporate officers, managers, supervisors, and shareholders who exercise operational control over employees. These individuals may be held personally liable for their corporate employer's obligations to employees, including back wages, interest, liquidated damages, and attorneys' fees.

Therefore, while shareholders generally enjoy limited liability, there are certain circumstances in which they may be held personally liable for the obligations of the corporation.

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