What are the rules regarding owner pay in a startup company?
Q. We are a startup company seeking investors, and we currently have limited cash flow. The company’s founders own the company on a 50/50 basis and are serving as the company’s officers. We can’t afford to pay them, and they are willing to work for free as part of their investment in building the company. Can we do that?
A. Possibly, as long as they own at least a bona fide 20% interest in the business and are engaged in certain executive-level management duties.
The federal Fair Labor Standards Act (FLSA) is the federal law governing wage-and-hour matters. It allows employers to bypass paying some employees who own a bona fide 20% equity interest in a business in which he or she is employed and who is actively engaged in exempt management duties. That’s true even if he or she does not meet the usual $455-per-week salary requirement of the major FLSA exemptions like the executive exemption.
To qualify, the business owner must engage in such activities as, but not limited to, selecting employees; setting their pay and hours; directing their work; maintaining production or sales records; appraising employees’ productivity; planning the work; determining the techniques to be used; controlling the flow and distribution of materials or merchandise and supplies; planning and controlling the budget; and monitoring or implementing legal compliance measures.
If your company’s owners engage in such activities, they should be exempt under the FLSA, as long as their 50% ownership interest is bona fide. Because state and local wage-and-hour laws can impose stricter requirements than the FLSA, your business should also review whether it could lawfully forgo paying the owners under state and local laws.