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Nightclub Shareholder is not an Employer in FLSA Claim

By Robyn Hagan Cain on March 02, 2012 | Last updated on March 21, 2019

Bartending isn't exactly a path to fame and fortune, but it can pay the bills. In our college days, the bartenders at our favorite bar -- which, admittedly, fell on the swankier end of the college-bar spectrum -- took in $500 in tips each night on home football game weekends. That's $500 on top of their 50-cent minimum wage, (or whatever the minimum wage was then).

No matter how lucrative the tips are, an employer must still pay a tipped employee a minimum wage, which is currently $2.13 for tipped employees. So who qualifies as an employer? This week, the Fifth Circuit Court of Appeals offered clarification on that point.

To determine whether an individual or entity is an employer, a court must use an "economic reality test" to consider whether the alleged employer:

  • Possessed the power to hire and fire the employees.
  • Supervised and controlled employee work schedules or conditions of employment.
  • Determined the rate and method of payment.
  • Maintained employment records.

Using this test, the Fifth Circuit Court of Appeals ruled that a Michael Powers, an investor in a failed Houston nightclub, did not qualify as an employer for the purpose of a Fair Labor Standards Act (FLSA) claim.

Nicholas Gray, a bartender at the Pasha Lounge for 12 months, claimed that Pasha bartenders were not paid an hourly wage, and were compensated solely by tips. While Pasha Lounge, for at least part of that time, had a General Manager who oversaw bartender compensation, Gray brought an FLSA complaint against Powers, who only set foot in the bar five or six times.

Gray alleged that Powers was a "supervisor" at the club because Powers once told Gray he was doing a "great job," and asked Gray to serve specific people on two separate occasions. That, according the Fifth Circuit, was not enough to satisfy the economic reality test.

The Fifth Circuit noted, "While each element need not be present in every case, finding employer status when none of the factors is present would make the test meaningless. We decline to adopt a rule that would potentially impose individual liability on all shareholders, members, and officers of entities that are employers under the FLSA based on their position rather than the economic reality of their involvement in the company."

Tipped employees are entitled to a minimum wage, but employees who don't get wages can't get relief when they bring FLSA claims against the wrong defendants. Save yourself some time and a Fifth Circuit Court of Appeals rejection: make sure that the "employer" you name in an FLSA claim satisfies the economic reality test.

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