Blurred Lines: When Business Owners and Employees Are The Same People

Posted by William J. Piercy on

As business becomes more flexible, more casual, and more entrepreneurial, traditional distinctions between business owners and employees can seem antiquated. Owners frequently roll up their sleeves and pitch in with lower level tasks. Employees are increasingly empowered to take on more responsibility and interest in their work. The lines can become even more blurred when employees hold an ownership interest in the business and owners take a regular salary in addition to (or perhaps in lieu of) distributions.

Business owners typically have a say in the management of the business, a right to a share in the profits, and a right to inspect the company’s books and records. Employees generally have the rights to be free from discrimination and harassment; a safe workplace; be free from retaliation; and fair wages for work performed. So what happens when a person holds both titles as an owner and an employee? Despite the sometimes fuzzy line between these roles, the law continues to recognize distinctions between them. In other words, if one person is both an owner and employer, he is generally afforded the rights of each.

This can come as a surprise to a co-owner, particularly of a closely-held business, who may be uncomfortable sharing the company’s financial information employees.  That same business owner may bristle at the notion of affording his co-owners all the rights to which an employee is entitled. In considering these roles and the rights and obligations that follow, it is important to understand the distinctions between them.

Employees: An employee is generally a person who works in the service of another person or company for wages or a salary. The employee-employer relationship is governed by either an express or implied contract for hire, under which the employer generally has the right to control certain details of the work place. Employees can take many different forms – some are salaried, others are paid hourly, some are full time, others are part time – but, importantly, all employees are afforded rights under both state and federal law that employers and owners must provide.

Employees are protected under numerous federal statutes and regulations governing such issues as discrimination, wage and hour requirements, taxes, workers compensation, unemployment insurance, and privacy. Careful consideration of these and other issues is important. For example, as an “at-will” state, Georgia permits employers to terminate their employees at will for nearly any non-discriminatory reason without penalty. Similarly, employees are entitled to earn the minimum wage, and are generally entitled to overtime pay in the event that they work more than a standard workweek of 40 hours per week, unless otherwise excepted from the regulations.

Business Owners: Owners, on the other hand, are generally the individuals or entities who own a business entity for the purpose of profiting from the successful operation of the business. Along with their ownership interest, owners generally have decision-making authority and a right to a share of the profits. Depending on the ownership structure and any agreements between the parties, owners are typically vested with the right to vote on matters relating to the operations and management of the company. Owners are also generally permitted to review the books and records of the company, which includes the organizational records (by-laws, operating agreements, shareholder agreements, and the like), transactional records (leases, customer contracts, title to property), and financial records (tax returns, balance sheets, profit and loss statements, and bank statements).

Employees as Owners: All of the rights, duties, and obligations of owners and employers become intertwined when owners become employees, and vice versa. For example, when employees are given ownership interest in a company as part of a compensation plan, they become entitled to the rights of an owner, including access to the books and records, that they otherwise would not have. The is generally also true for an owner who takes a salary. That owner is then protected by the same laws and regulations that protect employees, including the right to be free from discrimination and to be paid in compliance with wage and hour laws.

A prudent business owner will consider the implications of dual role owner/employees within the company on the front end.  By making a fully informed decision, the savvy owner will be ready for all of the potential issues that may later arise out of the newly transformed relationship.