Can a Member of a South Carolina Limited Liability Company be an Employee of that Company?

September 18, 2018 - Tyler K. Gilliam

In Morin v. Innegrity, LLC, the South Carolina Court of Appeals permitted a member of an LLC that was performing services for the LLC to recover unpaid wages under the South Carolina Payment of Wages Act (SCPWA or the Act). Though the parties did not raise the issue, the case presented an interesting question about whether the protections of the Act extend to service members of an LLC.  (Note that in the ensuing discussion “LLC” is used interchangeably with “partnership” and “member” with “partner.”) 

The purpose of the SCPWA is “to protect employees from the unjustified and willful retention of wages by [an] employer.”[1]  The Act, however, does not define “employee” and unhelpfully defines an “employer” as “every person, firm, partnership, association, [or] corporation . . . employing any person in [South Carolina].” Predictably, when lawmakers drafted the SCPWA they did not address the treatment of partners as employees. 

The Wage and Hour Division of the United States Department of Labor, on the other hand, is clear that partners are not employees of their partnerships under the Fair Labor Standards Act (FLSA), the federal equivalent to the SCPWA. In its Field Operations Guide, the Wage and Hour Division states that “[an] employment relationship [does not] exist between a bona fide partnership and the partners of whom it is composed . . . since [the partners] cannot be said to be employed by an employer separate and distinct from themselves.” Accordingly, partners cannot recover against their partnerships under the FLSA. 

Because there is not guidance on the treatment of partners under the SCPWA, the Act’s general provisions apply. Specifically, section  41-10-80(c) provides that for “any failure to pay wages due to an employee . . . the employee may recover in a civil action an amount equal to three times the full amount of the unpaid wages, plus costs and reasonable attorney's fees . . . .”  Therefore, to recover under the SCPWA an individual must be an “employee” earning “wages.” Fortunately, the Act does define “wages.” So ignoring, momentarily, the thorny partner-as-employee issue, let us consider how a partner might earn “wages” from her partnership.

The SCPWA broadly defines “wages” as “all amounts at which labor rendered is recompensed, whether the amount is fixed or ascertained on a time, task, piece, or commission basis . . . .”  The Act is silent about whether payments made to partners can be wages. From an income tax perspective partners cannot earn W-2 wages from their partnerships. Instead, they are paid in one of three ways. For returns on investments in a partnership, partners receive a “distributive share.” Because a distributive share is not earned for performing services, it is not a “wage,” and partners owed a distributive share cannot recover under the SCPWA.

Partners that do perform services for their partnership are paid either “707(a) payments” or “guaranteed payments for services.” Partners earn “707(a) payments” for services performed for a partnership outside of the partner’s capacity as partner - e.g., a partner at a law firm being paid to perform services other than legal services for the firm. Alternatively, partners that perform services for a partnership in their capacity as partners typically receive pre-arranged, fixed payments called “guaranteed payments for services.” These payments are called “guaranteed payments” because they are contractually required to be paid regardless of the income of the partnership. While neither form of payment is a “wage” for tax or FLSA purposes, both 707(a) payments and guaranteed payments for services probably are “wages” under the SCPWA definition as each payment is an amount “[for] which labor rendered is recompensed.”

In any event, even a partner earning “wages” for services performed for her partnership cannot recover under the SCPWA unless she is also an “employee” of the partnership. Though the Act itself is silent, our Supreme Court in two unanimous opinions has stated explicitly that “[w]orking partners are not employees.”  Daniels v. Roumillat, 264 S.C. 497, 502 (1975); Marlow v. E.L. Jones & Sons, Inc., 248 S.C. 568, 771 (1966). Ordinarily such plain guidance would bind a lower court, and so perhaps the Court of Appeals would have rendered a different decision had the parties brought these cases to its attention.

 

[1] Mathis v. Brown & Brown of S.C., Inc., 389 S.C. 299, 698 S.E.2d 773, 783 (S.C.2010) (quoting Rice v. Multimedia, Inc., 318 S.C. 95, 456 S.E.2d 381, 383 (S.C.1995)).

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