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March 10 --The U.S. Supreme Court declined March 10 to review a federal appeals court ruling that an owner, president and chief executive officer of a New York supermarket chain is personally liable as an “employer” under the Fair Labor Standards Act for his companies' default on payment obligations pursuant to an overtime settlement agreement with a class of store managers (Catsimatidis v. Irizarry, U.S., No. 13-683, cert. denied 3/10/14).
In July 2013, the U.S. Court of Appeals for the Second Circuit found that although John Catsimatidis was not responsible for any of the alleged FLSA violations against store managers of Gristede's supermarkets and did not directly manage the class members, Catsimatidis still retained personal liability because he had operational control over the entities that ran the markets and had functional control over the managers' employment ( 722 F.3d 99, 20 WH Cases2d 1674, 2013 BL 181264 (2d Cir. 2013)).
Petitioning for Supreme Court review, Catsimatidis argued that the justices must resolve an alleged circuit split about whether an individual must be responsible for the FLSA violations before personal liability can attach under the law. He also contended that the Second Circuit's decision conflicts with the FLSA's text, corporate law principles of limited liability and high court precedent.
In an opposing brief, the store managers countered that a live controversy no longer exists for Supreme Court jurisdiction because the parties settled the suit and Catsimatidis's co-defendants fully satisfied their joint obligations under the final settlement.
Even if a live controversy was present, they added that the case has “no issue worthy of review” because no appeals court has adopted a rule requiring an individual to have personal responsibility over FLSA violations in order to be held personally liable, and because the issue of individual liability “matters in only a very small subset of FLSA cases.”
According to the Second Circuit's ruling, Gristede's Foods Inc. and four related entities operate approximately three dozen stores in the New York metropolitan area and employ approximately 1,700 workers.
Current and former co-managers and department managers sued Catsimatidis, two other officers, and the Gristede's corporations in April 2004, alleging unlawful reduction of hours, failure to pay overtime wages, misclassification of employees as overtime-exempt, and retaliation in violation of the FLSA and the New York Labor Law.
The U.S. District Court for the Southern District of New York in September 2006 certified a class of approximately 400 co-managers and department managers employed by the chain after April 30, 1998. About two years later, the district court granted summary judgment to the managers on their FLSA and NYLL claims (172 DLR A-5, 9/5/08).
Thereafter, the companies and managers entered into a settlement agreement, but the companies ultimately defaulted on their payment obligations.
The managers moved for partial summary judgment on Catsimatidis's personal liability as an employer for the remaining $2 million obligation. The district court granted the motion in September 2011, and the Second Circuit affirmed.
The parties entered into a final settlement, and the amount due to the managers was paid in full by Gristede's.
In seeking Supreme Court review, Catsimatidis argued that a circuit split exists concerning personal liability under the FLSA.
He said the First Circuit in Baystate Alternative Staffing Inc. v. Herman, 163 F.3d 668, 5 WH Cases2d 65 (1st Cir. 1998), held that personal liability cannot attach unless an individual was personally involved in causing the FLSA violations, and that the Eleventh, Seventh and Eighth circuits have adopted the same position.
By contrast, Catsimatidis said the Second, Fifth, Sixth and Ninth circuits have concluded that individuals may be personally liable for FLSA violations “based merely on their general control over a company.”
“[T]he liability of individual owners, officers, and managers of corporate entities for FLSA violations committed by the entity turns on the geographic region in which those individuals happen to face suit,” he said. “There is no reason for this Court to tolerate such geographic variation in the application of an important federal statute.”
Additionally, Catsimatidis contended that imposing personal liability on an individual based solely on his “general corporate authority” conflicts with the FLSA's text, corporate law rules of limited liability and Supreme Court precedent.
“The term 'employer' as used in the FLSA cannot reasonably be understood as authorizing personal liability for corporate FLSA violations, at least not when the individual has no personal responsibility for the conduct at issue,” he said.
Pointing to “traditional agency principles” of corporate law, Catsimatidis observed that a corporation, and not its officers or owners, are vicariously liable for the unlawful activity of its employees or agents, and that individual liability will be found only in “exceptional circumstances” in which the corporate form will be disregarded.
He said the high court repeatedly has held that “it will not presume Congress means to depart from such well-established principles unless a statute 'speak[s] directly to the question addressed.' ”
The FLSA, Catsimatidis said, does not expressly provide for owner or officer liability. He acknowledged that the law defines an “employer” as including “any person acting directly or indirectly in the interest of an employer in relation to an employee.”
However, he said that provision “simply establishes that liability under the Act is not strictly limited to corporate entities,” and “does not say anything about whether a given individual qualifies as a 'person acting directly or indirectly in the interest of an employer in relation to an employee.' ”
He added that the definition “by its terms excludes individuals who act only in relation to the enterprise as a whole, and do not exercise personal responsibility for the decisions affecting the employees.”
Finally, Catsimatidis claimed that his case should be reviewed because it “presents a recurring question of national importance.”
“There is no doubting the importance of the issue to businesses and the individuals who own and manage them,” he said.
Under the Second Circuit's holding, owners and officers “who exercise no direct responsibility over company acts that violate the FLSA may be forced to personally pay class wages and penalties that can total millions of dollars, as this case demonstrates,” Catsimatidis said.
Opposing review, the store managers argued that the high court lacks jurisdiction because no live controversy remained after they settled their claims with the Gristede's entities and Catsimatidis.
“Now that the parties have settled the case and fully consummated the settlement, the hypothetical question whether Catsimatidis should have been held jointly liable is of merely academic interest,” they said. “Even if the court were to grant certiorari and Catsimatidis were to prevail, this Court could not 'relieve [him] of an obligation that has already been extinguished by another party.' ”
In addition, the managers said no circuit split exists requiring Supreme Court resolution. No appeals court has adopted Catsimatidis's position that personal FLSA liability attaches only where an individual is responsible for the conduct that caused FLSA violations, they said.
Although the First Circuit in Baystate discussed an individual's personal responsibility, the employees said the court considered it as but one factor among many in determining the “economic reality” of the putative employer's relationship to a company's employees.
They observed that every federal appeals court that has considered the issue of personal liability has applied that same “totality of the circumstances” approach in determining when an individual may be held liable as an employer under the FLSA.
“At best, the cases on which Catsimatidis relies hold that individual defendants in those cases were not employers under the FLSA,” the managers said. “None challenges the consensus among the circuits that an individual with financial and day-to-day control over an enterprise is a proper defendant in an FLSA case.”
Furthermore, the employees disagreed with Catsimatidis that the Second Circuit's ruling would lead to “sweeping officer liability.”
“In the vast majority of cases, individual officers never realistically face personal liability because the corporate entities satisfy their obligations (as the corporate defendants eventually did in this case) and because 'employer-provided indemnification … assures that the enterprise will cover the individual's liability in the run of cases,' ” they said.
The managers said personal liability in FLSA cases “nearly always arises in one of two narrow contexts:” where a company is “truly insolvent” or where “its owners can credibly threaten bankruptcy, dissolution, or insolvency to avoid paying workers.”
Deepak Gupta, Gregory A. Beck and Jonathan E. Taylor of Gupta Beck in Washington, and Adam T. Klein, Justin M. Swartz, Molly A. Brooks and Paul W. Mollica of Outten & Golden in New York and Chicago represented the managers. Jonathan D. Hacker, Kathryn E. Tarbert and David K. Roberts of O'Melveny & Myers LLP in Washington filed the petition on behalf of Catsimatidis.
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To contact the editor responsible for this story: Susan J. McGolrick at email@example.com
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