The “Business Owners” Exemption

Kayla Moreland , May 14, 2015

Often times, cash-strapped businesses want to hire employees but lack the cash flow to do so.  Some businesses facing this predicament come up with creative solutions, such as paying employees in equity rather than cash, to avoid paying minimum wage and overtime pay.  But employers should pursue with caution, as this method could result in a violation of federal wage and hour laws.

The Fair Labor Standards Act (“FLSA”) requires employers to pay minimum wage and overtime pay to nonexempt employees.  After the 2004 amendments to the FLSA regulations, executive employees who are “business owners” fall within the Act’s exemptions.  However, simply replacing employees’ wages with equity interest does not automatically let employers sidestep their obligations under the FLSA.  Employees must meet two requirements to qualify under the special rule for “business owners.”  First, the employee must own at least a bona fide 20-percent equity interest in the enterprise.  Second, the employee must be “actively engaged” in the business’s management.  This includes duties such as training, interviewing, scheduling, and adjusting rates of pay.  If neither requirements are met, the employee is entitled to minimum wage and overtime pay.  Employers attempting to conserve cash through this alternative method of payment, therefore, must pay close attention to ensure proper compliance with federal wage and hour laws.

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