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July 05, 2012
Under FLSA, Exactly What Is an Employer?

A group of three colleagues who ran a lounge in Houston, Texas, invested in their business, forming a corporation. They were later joined by the brother and sister-in-law of one of the members. After the lounge closed, when a former employee wanted to sue the owners, did the court consider all of them employers?

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What happened. "Powell" and his two colleagues were later joined by his brother and his brother's wife. The lounge only operated for 17 months in 2007 and 2008. Powell's sister-in-law kept the books and served as the point of contact for the general manager. The group hired a general manager, whose responsibilities included hiring and firing, setting operation hours, and supervising day-to-day operations. But the investors later determined that his salary was too expensive, and they let him go, replacing him by promoting one of the bartenders, "Gordon."

When the entire staff was let go after the lounge closed, Gordon sued Powell on behalf of the bartenders, contending that they had not been paid minimum wage and had received only tips. Gordon picked Powell to sue, because the general manager was gone and the corporation had been dissolved. But when his suit got to a federal district court, the judge learned that Powell had rarely even visited the lounge, much less taken part in its management. Powell's brother believed that he, not Powell, had promoted Gordon to be general manager, and Gordon had trouble remembering more than one occasion when Powell had been in the lounge and spoken to him.

The district judge ruled against Gordon but penalized the corporation for failing to show up while the case was heard. Gordon appealed to the 5th Circuit, which covers Louisiana, Mississippi, and Texas.

What the court said. Judges agreed the bartenders had been underpaid. But they noted that their circuit uses an "economic reality" test to determine who is and is not an employer. An employer under the Fair Labor Standards Act (FLSA) can hire and fire employees, supervises and controls work hours or conditions, determines pay methods and rates, and maintains employment records. It did not appear that Powell had done any of those things during the lounge's operations; the general manager had.

Furthermore, judges said, Congress clearly intended to shield individuals from personal liability when they do business in a corporate form. So they ruled that Powell was not an employer. Gray v. Powers, U.S. Court of Appeals for the 5th Circuit, No. 10-20808 (2012).

Point to remember: Gordon tried to persuade judges that Powell was a "joint employer," but they ruled that just saying he was didn't make it true.

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