Herman v. RSR Security Services Ltd.
172 F.3d 132 (1999)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
An individual qualifies as an 'employer' under the Fair Labor Standards Act (FLSA) if, under the totality of the circumstances and the 'economic reality' test, they exercise significant operational and financial control over the business, even without direct day-to-day supervision of employees. Furthermore, the FLSA does not provide employers with a right to contribution or indemnification from co-employers.
Facts:
- In late 1987, Murray Portnoy provided the financing to start RSR Security Services, Ltd. (RSR), owning 50% of the company and serving as its Chairman of the Board.
- Michael Stern, who was not a stockholder due to a prior IRS judgment, was made president and managed the daily operations of the security guards, including hiring, firing, setting service rates, and preparing payroll.
- Portnoy exercised significant financial control over RSR, including signing for loans, approving purchases, and having the authority to dissolve the company.
- Portnoy gave instructions to company management, such as directing Stern to stop illegally classifying guards as independent contractors on 1099 forms.
- Portnoy occasionally participated directly in the guard operations by hiring managerial staff, referring potential guards, assigning guards to clients, and resolving an employee's work-related complaint.
- Employees, including managers and guards, viewed Portnoy as the 'boss' of RSR.
- During the relevant period, RSR systematically violated the FLSA by deducting fees that brought guards' pay below the minimum wage and by falsifying payroll records to avoid paying proper overtime.
- Portnoy was an expert in the FLSA, having advised clients on its provisions for many years.
Procedural Posture:
- In 1993, the Department of Labor initiated an investigation into RSR.
- On December 7, 1993, the Secretary of Labor filed a complaint in the U.S. District Court for the Eastern District of New York against RSR, Michael Stern, and Frank Watkins for FLSA violations.
- The Secretary later amended the complaint to add Murray Portnoy as a defendant, alleging he was an employer under the FLSA.
- Portnoy filed an answer and later asserted cross-claims for indemnity and contribution against Watkins, Michael Stern, and Marilyn Stern.
- The district court denied cross-motions for summary judgment on the issue of Portnoy's employer status.
- In the same order, the district court dismissed Portnoy's cross-claims for contribution and indemnity.
- A bench trial was held, where defendants RSR and Stern consented to a default judgment, leaving Portnoy as the sole contesting defendant.
- The district court found Portnoy was an employer who willfully violated the FLSA and entered a judgment against him for back wages and liquidated damages totaling $157,756.04.
- Portnoy filed post-trial motions for a new trial and amended findings, which the district court denied.
- Portnoy (appellant) appealed the district court's judgment and orders to the U.S. Court of Appeals for the Second Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an individual who is a 50% owner and chairman of the board, exercises significant financial control, and has authority over company management, qualify as an 'employer' personally liable for wage violations under the Fair Labor Standards Act (FLSA), even if not involved in the daily supervision of the affected employees? Secondly, does the FLSA create a right for a liable employer to seek contribution or indemnity from other individuals involved in the company's management?
Opinions:
Majority - Cardamone, J.
Yes, an individual with significant operational and financial control is an 'employer' under the FLSA, and No, the FLSA does not provide a right to contribution or indemnity. The court determined Portnoy's status as an employer by applying the 'economic reality' test, which considers the totality of the circumstances. The court found that Portnoy met several factors of the test: he had the power to hire employees (specifically managers), he occasionally supervised and controlled work conditions (by directing revisions to employment applications), and he influenced the method of payment (by ordering a halt to an illegal payment practice). Although he did not maintain employment records, no single factor is dispositive. The court emphasized that Portnoy's operational control over the company's managers and his ultimate financial authority were sufficient to establish him as an employer. Regarding the second issue, the court applied the analysis from Northwest Airlines, Inc. v. Transport Workers Union, concluding that since the FLSA's text, purpose, and legislative history are silent on contribution or indemnity, and because the statute was enacted to protect employees rather than employers, no such right exists.
Analysis:
This decision reinforces the expansive definition of an 'employer' under the FLSA, establishing that liability is not limited to those with direct, daily supervisory control over employees. It solidifies that individuals with significant financial power and operational authority over a company can be held personally liable for wage violations, serving as a warning to high-level executives and owners. By explicitly denying a right to contribution or indemnification under the FLSA, the court places the full weight of liability on each party deemed an employer, preventing them from shifting the financial burden to other culpable managers and strengthening the statute's enforcement mechanism.
