Shabbat Parashat Shemini 5782

P'ninat Mishpat: Financial Security for a Partner/Worker?

Case: The defendant (=def) wanted to start a business with the significant funds at her disposal. She enlisted the plaintiff (=pl), a divorcee whom she had dated briefly, to help her. Def first paid pl’s consulting firm for his time. Later, pl quit his job to work with/for def. This gave pl greater work flexibility so he could manage child custody, and he received a minority stake in the LLC he opened for her (registered in Delaware). Pl started working for def on Apr. 1, 2012, and they seemed to be in the midst of finalizing an “employment agreement,” which had not yet been signed, when def informed pl, on June 10 that she would no longer pursue his proposed course of action and that their “partnership” was over. Pl is suing for: $20,000 for work before Apr. 1; $29,110 for salary from Apr. 1-June 10 (based on a $150,000 yearly salary); $18,500 for expenses; $150,000 for severance pay; $7,900 in worker’s benefits. Def responds that she never hired pl; he was a partner in a business venture that never saw profits. The term “employment” that she did not oppose in the proposed contract was just to convince custody court that def had financial stability. She denies that he worked hard for her and demands the return of $52,100 she gave him as a loan (until profits would be seen). (Much of our information comes from extensive emailing between the sides.)

Ruling: Was pl a salaried worker?: Def explained the collaboration’s rationale as pl having extensive business knowledge and her having available funds. Considering that pl was concerned about financial stability and gave up a stable job, it is difficult to believe def’s claim that he was to receive no payment and had received only a loan. It is also noteworthy that their financial cooperation began with def paying pl’s employer for his consultation. Furthermore, pl had expressed a lack of confidence in def’s business acumen and as a junior partner, could not himself make any business decisions, including whether to progress with the business. One could possibly still argue that the combination of more flexible work conditions and the chance of significant profit lured him to a partnership even without any pay of security.

However, the contract drafts, which went back and forth between the two sides, are instructive even if they are not signed. In the absence of other documentation, they convey the basic idea behind the parties’ arrangements. Furthermore, on April 9, def emailed pl saying that she agreed to the terms of the contract “in principle,” pending emendations by a lawyer. 

The draft contract speaks of a $150,000 yearly salary and workers’ benefits for pl from the LLC and assigns def as guarantor of payment should the company fail. Regarding the status of guarantor, def redlined that she was willing to be a guarantor of payment only during the Primary Employment Period, which was three years. Def presented no evidence that the term “employment agreement” was meant only to convince a custody court.

Therefore, pl is to be paid as an employee of the company even though it closed without producing profits.

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