Rutherford Food Corp. v. McComb


By Aaron F. Olsen

The United States Supreme Court declined to review the Second Circuit’s decision in Irizarry v. Catsimatidis in which the Court of Appeals affirmed the District Court’s decision holding a Supermarket CEO personally liable for violations of the Fair Labor Standards Act (FLSA).

By way of background, in July 2013, the United States Court of Appeals for the Second Circuit affirmed the District Court’s decision that the CEO of a supermarket chain could be held personally liable for damages in Irizarry v. Catsimatidis.  The District Court had granted summary judgment in favor of plaintiffs in the class action case and held that plaintiffs were entitled to liquidated damages on their claims concerning reduction of hours, withholding of overtime, misclassification as exempt employees, and retaliation.  The parties entered into a settlement agreement.  However, the corporate defendants later defaulted on their obligations under the agreement.  Plaintiffs then moved for partial summary judgment on the CEO’s personal liability as an employer.

Individual liability under the FLSA turns on whether an employment relationship exists between the employee and the purported employer, the individual defendant.  The FLSA defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee….”  29 U.S.C. § 203(d).  An “employee” is defined as “any individual employed by an employer.”  29 U.S.C. § 203(e)(1).  Quoting from the U.S. Supreme Court’s  decision Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947), the Court of Appeals in Irizarry stated that the FLSA contains “no definition that solves problems as to the limits of the employer-employee relationship under the Act.”

The District Court reasoned that the CEO hired managerial employees, signed all paychecks to the class members, had the power to close or sell the stores, routinely reviewed financial reports, worked at the corporate office and generally presided over the day to day operations of the company.  The District Court concluded that there was no area of the store which was not subject to the CEO’s control, whether or not he chose to exercise it, and therefore the CEO had “operational control” and could held liable as an employer.

The CEO argued that he was a high-level employee who made symbolic or, at most, general corporate decisions that only affected the plaintiffs through an attenuated chain of causation.

The Court of Appeals noted that it had previously set forth four factors to determine the “economic reality” of an employment relationship: (i) whether the alleged employer had the power to hire and fire the employees, (ii) supervised and controlled employee work schedules or conditions of employment, (iii) determined the rate and method of payment, and (iv) maintained employment records.  However, the Second Circuit also stated that it had examined different indicia of “operational control” in other cases, with the intent of assessing whether a defendant exercised functional control over a worker.

In conducting its analysis, the Court of Appeals noted that the CEO personally owned the building where the headquarters were located.  In addition, he stayed apprised of how the supermarket chain was doing, reviewing the overall profit and loss statements as well as the “sales to purchases” statements of particular stores. He received weekly gross margin reports from all the “perishable departments” and a comprehensive Profit and Loss report on a quarterly basis that he studied in depth and sometimes used to make general recommendations. He also made “big picture” merchandising decisions, like whether to push Coca-Cola or push Pepsi-Cola” and the decisions on having pharmacies in the stores.  He would also visit the stores regularly and make comments to the store managers about displays, merchandising decisions and discuss what is going right and what is going wrong.

The Court of Appeals concluded, in what it described as a “close case,” that there was no evidence that the CEO was responsible for the FLSA violations, or that he ever directly managed or otherwise interacted with the plaintiffs.  Nevertheless, the supermarket CEO was an “employer” for the purposes of the FLSA because his control over the hiring of managerial employees, and his overall financial control of the company meant that he possessed “operational control” over the plaintiffs’ employment.

The potential to be held personally liable for violations of the FLSA understandably creates concern for CEOs – especially those of medium-sized companies that have a large enough number of employees to create significant exposure but not enough resources for the Company to pay for a large judgment that may come from losing a class-action.