By: Foy Meyer III

Corporate officers should beware that liability for unlawful employment practices under the Fair Labor Standards Act (FLSA) can reach beyond the protective umbrella of a business and into their personal funds. For Maine employers, the First Circuit’s recent decision in Chao v. Hotel Oasis, Inc., 493 F.3d 26 (1st Cir. 2007), is an unsettling reminder of this point.

How does Chao v. Hotel Oasis relate to your business?

According to the U.S. Small Business Administration and Maine Office of Economic Development, the vast majority of businesses operating in Maine — both large and small — are locally owned and/or controlled, which leaves corporate officers’ personal assets vulnerable during many liability disputes.

For example, In Hotel Oasis, a group of 282 hotel workers — from cooks to maintenance workers — successfully asserted numerous minimum wage and overtime violation claims under the FLSA against their corporate employer as well as its president in his individual capacity.  Siding with the hotel workers, the First Circuit held the hotel and its president jointly and severally liable for over $280,000 in back wages and liquidated damages covering a period of roughly four and a half years of willful FLSA violations. 

When does “operational control” lead to personal liability?

The First Circuit’s rationale for holding the hotel’s president personally liable was, in essence, his undisputedly “instrumental role [in] running the hotel[,] managing its employees [and] causing the corporation to violate the FLSA.” 

The First Circuit emphasized that “a corporate officer with operational control of a corporation’s covered enterprise is an employer” within the meaning of the FLSA and, therefore, can be held personally liable for willful violations of the statute.

In determining whether a corporate officer has sufficient “operational control” to warrant personal liability for a willful violation, the First Circuit instructed that the following basic factors must be carefully evaluated:

• ownership interest in the corporation
• degree of control over the corporation’s financial affairs and compensation practices
• role in causing the corporation’s statutory violation

How can you avoid personal liability under FLSA?

While the First Circuit’s decision in Hotel Oasis recognizes that personal liability is not necessarily justified for “just any employee with some supervisory control over other employees,” the ruling signifies the increasing prevalence of such liability for the key decision-makers behind unlawful employment practices of various kinds.