Question:

I am a working partner in a small business. My partner supplied all of the start up money and keeps a pretty tight control over the financial aspects of the business. I work sixty hours a week performing mostly physical labor. I am the only “employee” of the business. I have told my partner that I should be paid overtime, and he has informed me that partners are not eligible for overtime. I was a forty percent shareholder in the last business I worked for. I worked long hours in that position as well, but did receive overtime pay. Do I have a right to overtime in my current position?

Answer:

Probably not. This is because the very nature of a partnership is that partners have equal rights to participate in the management and control of business and no partner has the right to receive compensation for services performed for the partnership unless the other partners agree in writing or by conduct. In addition, although not addressed in their current enforcement guidelines, the Department of Labor Standards Enforcement (DLSE) has taken the position that partners are considered self-employed individuals and not employees of the partnership. For that reason, partners are not entitled to overtime or the protection of any of California’s wage and hour laws. However, because a corporation is a separate legal entity, the DLSE takes the position that shareholders that provide services to the corporation may be considered employees of the corporation and if so are entitled to the protection under California’s wage and hour laws.

While there have been no changes in the law on this issue since the DLSE issued its original opinion with respect to partners, for a couple of reasons there is a lack of certainty as to the DLSE’s current position. The first reason is that pursuant to Executive Order S-2-03, the DLSE Enforcement Policies and Interpretations Manual is currently under review to determine its legal force and effect and to ensure it complies with the requirements of the California Administrative Procedures Act. If it turns out that the Manual is not compliant with the Administrative Procedures Act, any DLSE policy would carry little weight. The second reason is that in 2002 the DLSE’s Enforcement Policies and Interpretations Manual was updated and the reference to this issue was removed. However, until there is a final decision regarding compliance with the Administrative Procedures Act, the prior DLSE policy will likely continue to be enforced and partners will be treated as self-employed individuals, and not as employees of the partnership for purposes of wage and hour law compliance.

In conclusion, it appears that you would not be entitled to overtime pursuant to California law. Rather, your compensation arrangement would be controlled by any agreement you and your partner have made with respect to this issue. I suggest you carefully review your partnership agreement and discuss the matter with your partner.
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