Many individual owners of closely held businesses want to hire an employee for the business, but lack the cash flow to do so. Periodically, owners of a cash-strapped, closely held business in New York, who want the business to hire a worker, will ask me whether, instead of paying the worker the minimum wage and any overtime pay, the business may compensate the worker by giving him a minority ownership interest in the business. The short answer is “no.”
There are two reasons why, in New York State, even an employee holding a minority ownership interest in the employer must be paid the minimum wage and any overtime compensation.
First, although federal law sets forth an executive exemption from the federal minimum wage which includes certain “[b]usiness owner[s],” see 29 C.F.R. §§ 541.100, 541.101, New York’s executive exemption from the state minimum wage does not include minority owners of businesses. See 12 N.Y.C.R.R. §§ 142-2.1, 142-2.14(a), 142-2.14(a), 142-2.14(a)(4), 142-2.14(a)(4)(i).
Second, although New York follows, among other federal ‘white collar’ exemptions from overtime pay, the executive exemption (including the “business owner” aspect of that exemption), New York requires that these categories of employees be paid at least 1½ times the New York minimum wage of $7.25 per hour for their overtime hours.
By way of background, the federal Fair Labor Standards Act, 29 U.S.C. §§ 201-219 (the “FLSA”), and its implementing regulations, 29 C.F.R. §§ 510 et seq., mandate that most workers in the U.S. be paid not less the federal minimum wage of $7.25 per hour for all hours worked and overtime compensation at 1½ times the regular rate of pay for all hours worked over 40 hours in a workweek.
However, the FLSA provides, among other “white collar” exemptions from both minimum wage and overtime pay, an exemption for employees employed as bona fide executive employees. FLSA § 13(a)(1), 29 U.S.C. § 213(a)(1); 9 C.F.R. §§ 541.100. Exempt executive employees include, among others, “any employee who owns at least a bona fide 20-percent equity interest in the enterprise in which the employee is employed, regardless of whether the business is a corporate or other type of organization, and who is actively engaged in its management.” 29 C.F.R. § 541.101.
The New York State Minimum Wage Act, N.Y. Labor Law §§ 650-665, and section 142-2.1 of Title 12 of the New York Codes, Rules and Regulations require that employees in New York be paid at least the New York minimum wage of $7.25 per hour for all hours worked. In New York, covered employees who work overtime must be paid at a rate that is 1½ times their regular, “straight-time” hourly rate of pay. 12 N.Y.C.R.R. § 142-2.2.
As stated above, the FLSA sets forth exemptions from the minimum wage for, among other white collar workers, executive employees. New York’s executive exemption from the minimum wage is narrower than its federal counterpart. In particular, New York’s executive exemption from the minimum wage does not include employees with a minority ownership interest in their employer.
As also stated above, the FLSA provides exemptions from overtime compensation for, among other white collar workers, executive employees (including employees with a 20% ownership interest who are actively engaged in management of the enterprise). New York follows the FLSA’s executive exemption from overtime pay, but requires that these executive employees be paid at least 1½ times the New York minimum wage of $7.25 per hour for their overtime hours. 12 N.Y.C.R.R. § 142-2.2.
In sum, a company in New York may not pay its workers in ‘sweat equity’ rather than in wages.
Call the Law Offices of David S. Rich, LLC at (212) 209-3972 to speak with a knowledgeable labor and employment lawyer about ensuring that your company complies with overtime pay and other wage and hour laws, or to retain a skilled overtime attorney to defend your company in unpaid overtime lawsuits or other wage and hour litigation.