A minority shareholder in a limited liability corporation could be considered an employee for purposes of bringing misclassification and Wage Act claims, a Superior Court judge in Massachusetts has ruled.

Plaintiff James Raleigh was a member and 10-percent owner of defendant Lighthouse Life Sciences Partners, LLC while also working for the company as an “independent sales agent” (ISA).

After Lighthouse allegedly changed his compensation in violation of his ISA agreement and then terminated him, Raleigh brought actions under the Wage Act and Independent Contractor Statute.

Lighthouse argued that Raleigh’s ownership stake in the company precluded him, as an “employer,” from simultaneously being an employee.

But Judge Elizabeth A. Dunigan disagreed, noting that the Massachusetts Supreme Judicial Court, in its 2017 Segal v. Genitrix, LLC decision, described an “employer” for Wage Act purposes as someone with management responsibilities akin to a corporate president or treasurer with control over finances or payment of wages.

“There is nothing in the record showing that Raleigh had any authority over the daily operations of Lighthouse,” wrote Dunigan. “Under these circumstances, Defendants have failed to demonstrate a lack of any material dispute concerning whether Raleigh should be treated as an ‘employer’ who is precluded from claiming protections under the Wage Act.”

Alleged misclassification

Before Lighthouse started operations, Raleigh owned and operated Raleigh Sales LLC (RSC) and defendant Douglas Manchester owned and operated Unimed-Midwest, Inc., a distributor of cleaning and disinfectant-related medical products.

RSC was a distributor of Unimed’s products.

Lighthouse was organized in June 2017. On May 1, 2018, Manchester, his son Christian and Raleigh entered into an LLC agreement under which Manchester took 70 percent of common shares, Christian received 20 percent and Raleigh was granted a 10 percent ownership.

Throughout Raleigh’s tenure, Lighthouse sold cleaning and disinfecting products to the vivarium and laboratory animal research markets.

Raleigh and Lighthouse also entered into an ISA agreement under which he was to receive a $140,000 annual base salary and could only be terminated by mutual agreement, for cause or for breach of his noncompete.

When operations began in May 2018, Christian served as president, reporting to Manchester. Robert Deck was senior sales vice president reporting to Christian. Raleigh, in turn, reported to Deck, as did others with sales roles.

At that time, substantially all of RSC’s prior customers became Lighthouse customers. Raleigh made sales on Lighthouse’s behalf directly to customers and indirectly to distributors and was the only person on the sales team not classified as an employee.

Almost immediately, conflict apparently broke out between Raleigh and upper management over customer contact procedures that Raleigh allegedly wasn’t adhering to.

In October 2018, Raleigh was placed on a performance plan under which he was required to follow the processes in question.

On Nov. 11, 2021, Lighthouse terminated Raleigh’s engagement for allegedly not following its instructions or efficiently managing his time.

Four months prior to his termination, Deck’s replacement Joseph Scuccimarri emailed Raleigh a new ISA payment and incentive plan purporting to unilaterally alter Raleigh’s compensation.

This updated agreement reduced his base salary to $100,000 and reserved Lighthouse’s right to unilaterally amend, modify or terminate the agreement at any time.

Raleigh apparently refused to execute the agreement until an “earned bonus” he was allegedly owed was paid in full. Lighthouse asserted that the new agreement became effective as of August 2021 without or without his assent.

From August 2021 to the end of Raleigh’s engagement that November, Lighthouse paid Raleigh based on the $100,000 salary set forth in the 2021 agreement, not the $140,000 base salary from the 2018 ISA.

Raleigh, following his termination, brought claims for Wage Act violations and misclassification. Both parties moved for summary judgment.

Employee status

Dunigan rejected Lighthouse’s argument that because Raleigh was a minority shareholder he was precluded from being an “employee” under the Wage Act and the Independent Contractor Statute.

Specifically, Lighthouse argued that Raleigh should be treated instead as an “employer” precluded from Wage Act protections because of his minority ownership share and limited voting rights.

Applying the test from Segal, however, the judge noted that nothing in the record suggested that Raleigh controlled, directed or formulated financial policy for Lighthouse.

“Instead, Raleigh has produced evidence that he served Lighthouse in a sales capacity under the 2018 ISA Agreement, was supervised by Manchester and others at Lighthouse, and did not participate in the financial management of Lighthouse in any significant way,” Dunigan said.

Therefore, the judge concluded, Raleigh’s claims could proceed.