Many early-stage startups do not have the cash flow to cover the high salaries formerly earned by their founders and key executives. As a result, startups often compensate these individuals with equity in lieu of a higher salary. Startups should not automatically assume this is permissible under the wage-and-hour laws.
The federal Fair Labor Standards Act exempts business owners from the minimum wage and overtime pay requirements without having to meet a minimum salary threshold if they:
- own at least a bona fide 20-percent equity interest in the business in which they are employed, and
- are actively engaged in the management of the business.
However, New York law does not contain a similar exemption.
This means that, in New York, founders and key executives must meet one or more of the state’s exemption requirements in order to be exempt from the minimum wage and overtime pay requirements. The exemption requirements include a duties test and a minimum salary threshold.
The thresholds vary by location. Effective December 31, 2019, they are:
- New York City – $1,125/week ($58,500/year)
- Nassau, Suffolk and Westchester counties – $975/week ($50,700/year)
- Remainder of New York State – $885/week ($46,020/year)