by Emily H. Bensinger

The U.S. District Court for the Western District of Pennsylvania recently refused to dismiss claims against a company's CEO under the assumption that he exercised substantial authority over its hiring and firing decisions. However, the court also may have pointed the CEO toward an escape hatch.

Background

Davison Design & Development is in the business of assisting inventors with preparing and presenting their ideas to companies, manufacturers, and retailers. Davison performs its business through sales representatives, whom it doesn't consider commissioned employees exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). The sales representatives claim they regularly worked 42 to 52 hours per week but weren't paid an overtime rate for hours over 40 during the workweek.

George Davison, the company's CEO, allegedly supervised and directed the company's employment practices. He is accused of being partially responsible for Davison's policy of not paying employees at the overtime rate for their overtime hours.
The U.S. Department of Labor (DOL) filed a complaint against Davison and its CEO to bar them from violating the FLSA and require them to pay back wages and compensation to the affected employees. The defendants asked the court to dismiss the case based on the pleadings (i.e., the complaint filed by the DOL and the answer they filed in response to the complaint).

Court's analysis

The defendants argued that the CEO shouldn't be held individually liable because he didn't exert sufficient control over the decision not to pay overtime. The court analyzed when an individual may be held liable under the FLSA, noting that someone can be subject to FLSA liability when he exercised supervisory authority over the complaining employee and was wholly or partly responsible for the alleged violation while he was acting in the employer's interest.

An individual supervisor has adequate supervisory authority over an employee if he independently exercised control over the work situation. The court will consider the "economic reality" of whether the supervisor carried out the functions of an employer with respect to the employee.

The economic reality test requires the court to look at the totality of the circumstances, including whether the individual had the power to hire and fire the employee and whether he actually supervised and controlled the employee's work schedule or conditions of employment, determined the rate and method of pay, and maintained employment records.

Analyzing the allegations of the complaint in this case against what it means to have adequate supervisory authority, the court determined that the CEO had adequate authority over Davison's hiring and firing decisions, but it made that finding in a rather conclusory fashion. The court stated that "it is hard to believe that Mr. Davison did not exercise substantial authority over the hiring and firing decisions of Davison's employees."

The court also assumed that because he was the company CEO, he had power to supervise employees and oversee the maintenance of employment records. However, the court forecast how he could ultimately escape liability by presenting evidence of the internal structure of Davison's management showing that he didn't have control over employees' work schedules or the conditions of employment.

Bottom line

Although this case seems to indicate a possible trend toward the assumption that CEOs have sufficient supervisory authority to be held individually liable under the FLSA for a failure to adequately pay employees, it also signals that evidence of the company's internal supervisory structure could defeat such allegations.

For example, in a very large company, it may be impossible for the CEO to have the authority to hire and fire employees and set the terms of employment or rates of pay. In that case, having good documentation of the company's internal structure would be key.

Emily Bensinger is an Associate with Saul Ewing LLP. She can be reached at ebensinger@saul.com.