THE “EMPLOYMENT” RIGHTS OF AN OWNER/EMPLOYEE OF A MASSACHUSETTS RESTAURANT

Law Offices of John P. Connell, P.C.:   In Massachusetts, it is common that owners of restaurants will work for their restaurant business and be paid as an employee for such services as cooking or management, in addition to having an ownership interest in the profits and losses of the business.  The owner/employee often times receives a regular paycheck for his or her services, and receives a W-2 Form at the end of the year for those wages in addition to a statement of his or her profit and loss.

Restaurant businesses, however, slow down or even close down from time to time, and have to lay off their employees.  Other times, a combination of owners will decide to terminate the employment of a single owner/employee. When this occurs, and an owner/employee is fired or laid off from his or her employment, what are the rights of that person as an employee when he or she also owns an interest in the business?

At least with respect to unemployment benefits, this issue has been finally determined in Massachusetts.  On October 25, 2012, the Massachusetts Appeals Court rendered its decision in Den Herder vs. Director Of The Divisions of Unemployment Assistance.  The Plaintiff in this case, Den Herder, owned and operated the “33” Restaurant in Boston’s Back Bay neighborhood through a Limited Liability Company (an “LLC”), but also worked for the LLC as its manager, drawing a salary pursuant to his status as an “employee.”  At all times relevant, Den Herder received a W-2 for his wages.  When the restaurant went out of business in March 2010, however, Den Herder was out of a job and naturally he applied for unemployment assistance.

Although the Division of Unemployment Assistance (the “DUA”) initially provided unemployment assistance to Den Herder, and although the LLC had been paying into the DUA fund for years based upon Den Herder’s wages and status as an “employee,” the DUA held, and the Massachusetts Appeals Court just recently affirmed, that because Den Herder owned an interest in the LLC, Den Herder could not be both an owner and an employee, as LLC’s are viewed as “partnerships” under the law or, legally speaking, the “aggregate” of its individual owners.  One cannot personally be an “employee” of oneself after all.

In determining that an employee/owner of an LLC could not qualify for unemployment assistance pursuant to the Unemployment statute, G.L. c. 151A, the Appeals Court noted that the same is true for owner/employees of LLC’s under the Workman’s Compensation Statute, G.L. c. 152.  Accordingly, a person with an ownership interest in an LLC, cannot be an “employee” under two significant state statutes that provide rights to people acting as “employees” in the workplace.

The Massachusetts Appeals Court went on to rule, however, that when the entity that owns the business is a corporation, which legally speaking is viewed as a “separate entity” from its shareholder owners, and not an LLC, the owner/employee of a corporation would be entitled to both unemployment and workman’s compensation benefits under Massachusetts law.

The Massachusetts Appeals Court decision in Den Herder is significant in that it may have a legal effect on whether or not an owner/employee of an LLC can avail himself or herself of other “employment” related statutes, such as the Massachusetts Wage Act, G.L. c. 149; the Massachusetts Employment Discrimination Act, G.L. c. 151B; and potentially others.

The owner/employee of a restaurant business in Massachusetts may therefore want to decide whether he or she is better off working for an LLC or a corporation when setting up his or her business, as once it is set up and fully licensed, the structure is not easy to amend.

The owners of restaurants operated through an LLC may also want to be cognizant of the Den Herder decision when facing an “employment” related claim by own of its members.

 

© Law Offices of John P. Connell, P.C., 2012.

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