Many employers are shocked when they see how quickly a single complaint by an employee for unpaid overtime can turn into a collective-action lawsuit under the federal Fair Labor Standards Act (FLSA) and state labor laws.
Unlike discrimination claims filed under Title VII of the Civil Rights Act of 1964, there is no requirement that the employee file first with an administrative agency. In fact, the final cost of the case bears only a tangential relationship to the actual seriousness of the violation since even a good-faith error, if carried forward for many weeks, can result in significant cost.
There is also a practical certainty that an emploeyr will be required to pay the worker’s attorneys’ fees in addition to its own defense costs. The ease with which employees’ attorneys can certify a class or collective action under the FLSA — not to mention state statutes that sometimes impose even greater employer requirements — is astounding.
Add those factors to inaccurate timekeeping practices and misclassification of employees, and it’s no wonder there’s been a massive increase in class-action overtime lawsuits around the United States in the past several years.
HR Guide to Employment Law: A practical compliance reference manual covering 14 topics, including the overtime and FLSA requirements
Why are there so many violations?
Even though the FLSA was originally passed in 1938, there have been many interpretations, court decisions, and opinion letters from the U.S. Department of Labor (DOL) that have shaped how the statute is actually applied. To make matters more complex, the conditions under which work is done now versus how work was done in 1938 provides some stark contrasts. “Real life” is often vastly different from how a typical employer might interpret the regulations applying everyday logic.
Nevertheless, the basic provisions of the FLSA remain the same: a minimum wage, overtime for hours worked over 40 in the workweek, accurate recordkeeping of time worked, and minimum age requirements. But it’s the exemptions that usually get you into trouble.
Exemptions under the FLSA are like tax deductions; they have to clearly meet the regulations and be adequately documented. Further, there are very few black-and-white answers, particularly with regard to exempt employees. Decisions are very fact-specific. An “assistant manager” position may meet the requirements to be classified as an exempt employee in one company in a given industry and not meet them somewhere else.
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How does the bill get so high so fast?
It is entirely the employer’s responsibility to comply with the FLSA and applicable state law. The employee has no responsibility whatsoever and can’t waive his rights under the Act. If there’s a violation, it’s automatically your fault. And any violation, no matter how small, entitles the employee to file suit.
If an employer is found to be at fault, the employee (or former employee) will be entitled to back pay for up to three years (if the act was willful) or as far back as the violation occurred, whichever is shorter. He’ll also receive liquidated damages equal to the amount of back pay, and the employer will be required to pay his attorneys’ fees as well as its own.
Most wage and hour lawsuits are settled before trial because the likelihood of the employer winning at trial is very small. Even if you win, the costs will undoubtedly be huge, and the decision to pursue litigation through trial is generally a poor one. A cursory running of the numbers goes like this:
- An employer misclassifies three jobs and pays no overtime for three years.
- The employees each work an average of two hours of overtime per week and frequently work through lunch.
- The employer retains no time records for the employees.
- The average rate of pay for each employee is approximately $35,000 per year. Three employees multiplied by 2.5 hours per week, multiplied by 156 weeks, equals 1,170 hours of overtime. At a rate of approximately $25 per hour for overtime, that’s $29,250.
Double that total for liquidated damages, and you’re at nearly $60,000. And don’t forget the employees’ attorneys’ fees (at least $30,000) plus a similar defense cost, and you’re quickly approaching $120,000 — all for misclassifying three employees.
Unfortunately, wage and hour claims are generally excluded from employment practices liability insurance (EPLI) policies, so if an employer find itself in a situation like the one just described, it will likely be left to foot the entire bill. The only way to minimize exposure is through extensive monitoring of pay practices and processes reviewed by an expert and supported by education and training within the organization.
State-by-state comparison of 50 employment laws in all 50 states
How bad is it?
In 2005, there were 4,039 federal wage and hour suits filed — 10 percent more than the 3,671 filed in 2004, according to the Administrative Office of the U.S. Courts. In 2006, the number of federal wage and hour cases filed jumped another 4.2 percent to 4,207. Sadly, the pace shows no sign of slowing. Attorneys agree that wage and hour issues are the leading exposure right now for employers in the United States, even more so than employment discrimination.
Under the FLSA, it’s very easy to move a complaint into a collective or class action. Various state statutes also have contributed to the proliferation of wage and hour claims. In California, for example, the state supreme court ruled unanimously last year that the premiums owed to employees for missed meals and/or rest periods are “wages” subject to a three-year statute of limitations rather than a “penalty” subject to a one-year statute of limitations. That decision resulted in a dramatic increase in the number of cases alleging missed meals and rest periods against California employers. Employees’ attorneys find it all too easy to come across employers with inaccurate records of meal and rest breaks.
Find in-depth information on overtime and other wage issues in the Wage and Hour Compliance Manual
What can I do to protect myself?
There are two important steps: (1) Ensure that all exemptions claimed meet the regulatory requirements, and (2) keep accurate records of all hours worked by non-exempt personnel. Clear policies and procedures that detail the company’s payroll practices and time-reporting obligations are key.
It’s also essential that you provide a defined process for employees to voice compensation questions or complaints, including errors, misclassifications, or calculation of time worked.