Tuesday, November 20, 2018

Can LLC Members Be Employees? It Depends (Because of Course It Does)

Tom Rutledge posts the following over at the Kentucky Business Entity Law Blog:

LLC Members Are Not the LLC’s Employees

There is now pending before the Eighth Circuit Court of Appeals of a suit that may turn on whether the relevant question, namely whether an LLC member is an employee of the LLC, has already been determined by a state court. In that underlying judgment, the Circuit Court of Cole County, Missouri, issued a judgment dated October 9 18, 2017 in the case Joseph S. Vaughn Kaenel v. Warren, Case No.: 15 AC-CC 00472. That judgment provided in part:

As an equity partner of Armstrong Teasdale, LLP, [Kaenel] is not a covered employee protected by the Missouri Human Rights Act.

I am curious as to which case this is that is pending.  Tom knows his stuff and knows (and respects) the differences between entities, so I assume there is more to than appears here.  

For example, the fact that a state court determined that an LLP equity partner is not an employee does not inherently answer the question of whether an LLC member is an employee. It could, but it does not have to do so.  

In addition, I'd want to know more about the relationship between the LLC member and the entity.  I am inclined to agree that an LLC member is not generally an employee merely by virtue of being a member.  But I am also of the mind that an LLC member could also be an employee.  In fact, there are times when counsel would be wise to advise a client who is an LLC member to also get an employment contract is she wishes to get paid.  I am assuming there is not an employment contract here for the Eighth Circuit case. 

However, suppose in the operating agreement all the members agree to pay one member for certain services. Or perhaps the compensated member gets priority payouts because of her agreement to do certain work for the entity.  That would, as far as I am concerned, at least muddy the waters.

I'll be interested to see where this one goes (and, perhaps, what I have missed). But as far as I am concerned, LLC members can also be LLCs employees, even though the general answer is that they are not.  


Employment Law, Joshua P. Fershee, LLCs, Partnership | Permalink


Truly uninteresting. Surprisingly, I had not really focused in on this. I want to think about the underlying policy considerations.

An LLC member, qua member, is not an employee for business associations and tax law purposes. But could one not sign, e.g., a management agreement with a member--or an entity owned and controlled by the member? If one can do that, why not an employment agreement? What policy interests are at stake? It's worth more thought by me.

Also, although shareholders are not statutorily cast as owner-operators, they can be employed by a corporation. (Of course, since I am teaching close corporation "special rules" this week in Business Associations, I am hyper aware of the snarled mess created by presumed employment dictated by shareholdings in a closely held corporation . . . . See Wilkes . . . .) Hmm. Thanks for provoking some thought.

Posted by: joanheminway | Nov 27, 2018 6:31:51 AM

Oh, and, as a separate point, each statute can (and some do) have a specific definition of "employee" that may or may not, based on the policy underlying that statutory framework, capture folks that are non-employees under business associations or tax law. So, it may be that the definition of "employee" for purposes of human rights legislation or specific employment legislation is not an employee for business associations or tax law purposes. The policy of the statute at issue would govern that question, I assume, in the case of an ambiguity.

Posted by: joanheminway | Nov 27, 2018 6:36:33 AM

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