You’ve set up a your business as an LLC or a Corporation and followed all of the legal requirements to keep the business up under Texas law. Your lawyer tells you the company will protect you from personal liability to your creditors as long as you follow all the required formalities.
After a few years of really making a go of it and going without a paycheck yourself for months, you suddenly discover that you will not be able to make payroll this week. The big order you were counting on is not coming in and you have nothing to pay your 5 employees.
You call everyone into a conference room and let them know you are shutting down. There will be no more company. There will be no paychecks. The only solace you have is that what is left of your personal savings is exempt from creditors. Or is it?
The Federal Fair Labor Standards Act (FLSA) requires “employers” to pay their employees at least minimum wage. The definition of “employer” includes “any person acting directly or indirectly in the interest of an employer in relation to an employee.” Federal courts use what is known as the “economic reality” test to decide who meets the definition. Did the person or company:
(1) possess the power to hire and fire the employees,
(2) supervise and control employee work schedules or conditions of employment,
(3) determine the rate and method of payment, and
(4) maintain employment records.
Since there can be more than one “employer” under the FLSA, the owner of the business often also meets this definition and Federal courts have regularly held these business owners personally liable for back wages due employees.
The same is true under Texas law which has the same definition of “employer” but no clear guidance of what is required to meet the standard. That said, Texas did adopt the FLSA definition of employer and will be likely to follow the “economic reality” test, also.
What is worse, under the Texas labor code, “wages” has a much broader definition than under the FLSA. It includes vacation pay, holiday pay, sick leave, and severance pay. This means an owner who meets the definition of “employer” may be personally liable for these additional types of pay.
Be careful employers. It may be better to stop while you are behind than bet on that next job to cover payroll. Former employees have up to 180 days from the time the last wages were due to file a complaint with the TWC.