New York Federal Court Applies Expansive Employment Test to Find Wage Claimant Was Debtor’s Employee

By Peter D. DeChiara

pdechiara@cwsny.com

Posted September 2017

The Bankruptcy Code gives priority (under certain circumstances) to claims against a debtor company for unpaid wages.  But the Code contains no test for determining whether a person asserting a wage claim was, in fact, the bankrupt debtor’s employee, leaving courts to search for an appropriate test.  In a recent decision in a Chapter 11 bankruptcy, the federal district court for the Eastern District of New York looked to the expansive employment test under the federal Fair Labor Standards Act (“FLSA”) to find that a cashier who worked off-the-books for a bankrupt gas station could be deemed its employee.  See Gyalpo v. Holbrook Dev. Corp., Case No. 16-CV-3818 (E.D.N.Y. Aug. 29, 2017).

In Gyalpo, the cashier asserted a claim under Section 507(a)(4)(A) of the Bankruptcy Code, 11 U.S.C. §507(a)(4)(A), which gives priority to an individual’s allowed claim for wages, up to a limit of $12,850, if earned within six months of the earlier of either the bankruptcy filing or the debtor’s shutdown.  But no payroll record of the cashier’s work existed; the gas station’s manager paid him in cash.

The bankruptcy court for the Eastern District of New York denied the cashier’s claim without expressly identifying what test it applied to determine employment status.  The bankruptcy court simply concluded that the cashier failed to produce “tangible evidence” — and thus failed to meet his burden of proof — that the debtor gas station had employed him and owed him unpaid wages.

On appeal, United States District Judge Joseph Bianco reversed and remanded.  In doing so, he looked to the FLSA, the federal statute that, among other things, requires employers to pay a minimum wage.  Judge Bianco conceded that he could find no case where a court had applied the FLSA test to the Bankruptcy Code.  But he nonetheless concluded that, at least in cases arising in New York, the FLSA approach was “relevant” to Section 507(a)(4)(A), because, he noted, New York’s labor law applies an employer-employee test similar to the FLSA’s.

Judge Bianco noted that in FLSA cases, courts employ an expansive test for determining employee status, one grounded in “economic reality rather than technical concepts.”  Moreover, he explained, under the FLSA, when an employer fails to keep accurate records, the employee’s initial burden of proof “is not high” and can be satisfied based on the claimant’s own recollection.  Accordingly, the district court concluded, the bankruptcy court’s decision could not stand.
Judge Bianco’s willingness to look to the FLSA’s expansive, reality-based employment test is a welcome development in the bankruptcy case law.  Given how fluid work relationships have become in recent years, especially with the rise of the “gig” economy, the question of who is an employee and who is not has become more pressing than ever.  Courts should approach that question, as Judge Bianco did, with a flexible approach that is sensitive to the realities of today’s workplace.