Wage and Hour Violations: An Employer’s Single Greatest Uninsured Risk
By: JOSEPH M. SOKOLOWSKI & LINDSAY J. SOKOLOWSKI
Violations of the wage and hour provisions of the Fair Labor Standards Act (FLSA) and analogous state statutes are the single largest liability exposure for employers. Since 1997, wage and hour litigation has tripled while most other employment litigation has stabilized or declined. More wage and hour collective/class actions have been filed in recent years than all other types of employment class actions combined. Hope is not lost, however. Employers can take steps to avoid – or at least mitigate – wage and hour violations and resulting litigation.
The FLSA is the backbone of federal wage and hour law. The FLSA regulates minimum wage, overtime pay, equal pay, and child labor. Its overtime requirements are the most significant contributor to wage and hour violations and litigation.
Because the FLSA has attractive damage remedies and often involves large numbers of plaintiffs in a single action, it is the employment lawsuit du jour. Under the FLSA, plaintiffs can recover double the amount of actual damages and attorneys’ fees. In many instances, attorneys’ fees reach into the high six figures and sometimes seven figures. If a willful violation of the FLSA is found, a three-year statute of limitations applies to all plaintiff claims. Since FLSA litigation often involves large groups of employees, liability exposure is often in the millions of dollars. And, most insurance policies exclude coverage for FLSA claims.
Wage and hour violations that commonly result in litigation include:
- Misclassifying employees as “exempt” and failing to pay them overtime (the requirements for “exempt” status are set forth in the FLSA and often misapplied).
- Failing to pay non-exempt employees for overtime, including overtime not approved in advance.
- Allowing time worked “off the clock,” such as requiring employees to arrive early to perform necessary preparations for work or stay late to perform duties such as “closing up” after punching out, and not paying employees for donning and doffing (putting on or taking off specialized work clothes and equipment).
- Granting compensatory time off to non-exempt employees in lieu of overtime pay.
- Making automatic wage deductions, such as from exempt employees’ salaries for part-day absences, or from non-exempt employees’ pay for meal breaks when they do not clock in or out for those breaks.
- Failing to pay overtime to independent contractors when they qualify for “employee” status under the law.
- Overlooking and violating exemption requirements under state law (some state law requirements are more stringent than the FLSA).
An increasingly popular type of FLSA litigation is the collective action, which allows a class of employees to adjudicate their claims together using common evidence. If a collective action is certified by the court, court-approved notice is sent to all potential class members, who are then entitled to “opt-in” to the litigation. A FLSA collective-action lawsuit can include classes of hundreds, and sometimes thousands, of employees.
To minimize liability exposure under the FLSA and state wage and hour law, employers should:
- Perform an internal audit of the company’s wage and hour practices with the assistance of legal counsel. Review employee classifications, records, and policies, and document the conclusions. Having the audit performed by an attorney, resulting in a legal opinion, helps establish a “good faith” defense to “double damages” under the FLSA and can decrease the statute-of-limitations period to two years.
- Keep an accurate record of non-exempt employees’ work time. Have both employers and employees approve timesheets/hours records.
- Pay for all “hours worked.” Require non-exempt employees to “clock in” and “clock out” at the beginning and end of the workday and before and after unpaid lunch periods.
- Prevent employees from taking breaks in work areas.
- Pay fixed, predetermined salaries to exempt employees, without improper deductions.
- Train managers on the FLSA and state wage and hour laws.
- Create a plan of action and contact legal counsel in the event of a Department of Labor wage and hour investigation.
- Make documentation of job duties part of every employee’s job. Create accurate and effective job descriptions and update them frequently. For exempt positions, ensure the descriptions themselves satisfy the applicable-exemption test.
Taking these steps will help decrease your company’s exposure to wage and hour liability, deter administrative agency investigations, and, if litigation does occur, minimize exposure. The attorneys in Fredrikson & Byron’s Employment & Labor Law Group are happy to assist your company with wage and hour compliance. Please contact us for assistance.