As businesses wrap-up the year and celebrate the holidays, owners may not be thinking too much about 2015. But, there’s a Grinch lurking that may try to steal your joy and put a kink in your works.
Government investigations and employee lawsuits are on the rise for wage and hour violations. Small and mid-sized businesses are increasingly being targeted by the federal government.
Regulations have become more complex and stricter rules now apply to employee classifications. This increased burden on small business owners and HR managers makes mistakes costly.
Here’s why you need to make an internal wage and hour audit
a priority for early in the new year:
The large and increasing numbers of individual and group employee lawsuits under federal and state wage and hour laws, and the complexity of those laws, have made it nearly inevitable that an employer of any size and industry will face a wage, hour or overtime government investigation or lawsuit.
1. Employers Of All Types And Sizes Are At Risk
The number of wage and hour lawsuits filed against employers by the U.S. Department of Labor (DOL) and employees and former employees under the federal Fair Labor Standards Act (FLSA) and similar state laws, seeking back wages and overtime pay, has exploded in recent years. This has become the largest and fastest growing type of employment litigation.
Employer Liability Is Huge And Real.
$250 million in DOL investigations
$500 million in employee lawsuits
Based on public reports (there may be far more private settlements),
employers paid out in wage, hour & overtime claims last year:
Employers of all types and sizes are vulnerable. Wage and hour lawsuits are usually filed on behalf of several of an employer’s employees and former employees. The FLSA and DOL regulations are highly technical and filled with rules that are unknown to many employers (and lawyers). Simply stated, many employers are likely violating the wage and hour laws, do not know it, and would be surprised to learn how they are violating them.
Wage and hour lawsuits challenge a variety of employer practices and policies and are frequently based on:
- Whether employees are properly classified as exempt
- Employees allegedly working off the clock
- Unpaid wages or overtime based on shift premiums, on-call pay, training time, meal time, and travel time
- Additional overtime due as a result of commissions, multiple pay rates, and bonuses or other lump-sum payments
- A variety of claims about the proper calculation of overtime
These lawsuits are not limited to large employers. Experience has shown that employees’ lawyers often go after mid-size and smaller employers based on the theory that big companies are more likely to put up an expensive fight when they are sued. Some employees’ lawyers also believe that mid-size and smaller employers are less likely to be aware of the hidden pitfalls and technical nuances of the FLSA.
While employers in all industries are targets, many of the big-damage cases have been filed against employers in industries with a high percentage of office employees (such as financial services, real estate management, inside sales and customer service and other service or sales based activities), health care employers, hotels and motels, and local government employers.
An employer’s financial liability for wage and hour violations can be significant: back pay to each employee and former employee involved over a two to three year period, doubled, plus the plaintiffs’ attorney’s fees (in addition to the employer’s attorney’s fees). Because these cases typically involve groups of employees, the attorney’s fees are usually high.
The fact that an employer’s wage and hour violation was inadvertent or an honest mistake does not protect the employer from liability. Further, the law imposes special restrictions on the settlement of wage and hour claims. Unlike other employment lawsuits, the employer and employees (and their lawyers) cannot simply agree on a settlement amount. For a wage and hour settlement to be valid, the employees must receive an amount arguably equivalent to their full back pay and the settlement amount must be formally approved by either a court or the DOL.
2. The Federal Government Encourages These Lawsuits
The DOL has a lawyer referral program to help employees and former employees sue their employers. The government calls this its “Bridge to Justice.” The DOL provides a toll-free number to connect people who have made complaints of pay and overtime violations with an attorney referral panel to help them find qualified plaintiffs’ lawyers in their area.
The DOL also encourages employees to keep their own secret work records separately from their employer’s official records. The DOL has developed and publicized its “Work Hours Calendar,” in English and Spanish, to help employees show whether their employer maintains accurate records of their work time and pays them correctly. The government-provided work time calendar also contains what the DOL describes as “easy-to-understand information about worker rights and how to file a wage violation complaint.” The DOL has even incorporated these tools into a free “app” that employees can download from the DOL website and use at work on their smartphones.
3. Majority Shareholders And Officers Can Face Personal Liability
Business owners who operate their company as a corporation or LLC will not necessarily be protected from personal liability for the wage-hour and overtime violations of their company. While personal liability more often arises in a smaller business where the owner is directly involved in supervising employees, the risk of personal liability also extends to owners and officers of larger corporate businesses.
In a recent important case, a U.S. Court of Appeals decided that the majority shareholder/CEO of a grocery corporation with 2,000 employees and $250 million in sales was personally liable for overtime pay owed to department managers. Although the owner was far removed from the day-to-day work of most employees, he had approved treating store department managers as exempt supervisory employees where the court later decided they were not exempt.
4. Wage And Hour Claims = Increased Risk Of Unionization
Labor unions are prepared and eager to use an employer’s potential wage and hour violations as tools to organize its employees for union membership. To identify potential wage and hour violations, unions survey a company’s employees and former employees about their employer’s work and pay practices, calculations, and record keeping.
If the union uncovers any apparent violations (as they often do), the union will publicly challenge the company to pay its employees back wages so the union can take credit for helping the employees. The union may also provide lawyers for employees and former employees so they can file a wage and hour lawsuit against the employer. This is a powerful and successful organizing tool for unions.
Conducting Your Wage, Hour & Overtime Audit
Here are specific steps you can take to prevent wage and hour claims before they are filed.
1. Testing Compliance
The most effective step is the most obvious – identify and address any wage and hour violations within your organization. This, of course, is easier said than done.
The best approach is an internal audit of the employer’s wage and hour practices for compliance with federal and state law. Such an audit should be structured, but also tailored to the needs of the particular employer considering its size, number of employees, operation and budget. The audit must also take into account the differing laws of the states in which the employer has employees. Because there will be inevitable legal issues, the employer should have the help of its labor and employment law counsel.
Your Audit Should Include:
- Whether employees are correctly classified as exempt or non-exempt under the so-called white-collar exemptions (executive, administrative, professional, computer, outside sales, and certain highly-compensated employees) and other potentially applicable but less well-known exemptions. (Experience shows that most employers misapply these wage and hour exemptions with respect to at least some of their employees)
- Whether employees whose duties would make them exempt are paid according to the legal requirements for the exemption
- Whether non-exempt employees are paid for all of their compensable work time, addressing potential issues related to travel time, waiting time, meal and rest periods, pre-shift and post-shift activities, training time, time spent working at home, on-call time, working for two or more related entities, etc.
- Whether overtime for non-exempt employees is calculated correctly, addressing potential issues related to salaried non-exempt employees, shift differentials and other premium payments, on-call pay, reporting and call-back pay, reimbursement for expenses, bonuses and other lump-sum payments, profit-sharing payments, employees working at two or more pay rates, commissions, compensatory time off, and inappropriate averaging among weeks
- Whether the employer is properly taking advantage of or in compliance with legal requirements applicable to special categories of employees, such as truck drivers, local delivery drivers, certain health care employees, trainees, interns, seasonal employees, and those under the age of 18 or 16
- Whether the employer is complying with applicable rules concerning meals, rest breaks, and consecutive days of work
- Whether the employer is complying with applicable rules concerning the method and timing of wage and salary payments, deductions and withholding from paychecks, accrued vacation or sick pay, etc.
- Whether the employer is complying with applicable requirements as a result of the employer having any government contracts
- Whether the employer has improperly classified persons as independent contractors, consultants, etc.
2. Audit Of Wage And Hour Record Keeping
An audit of the employer’s record-keeping practices is critical. An employer that hopes to avoid wage and hour claims must maintain detailed, accurate, and complete records of employee work time and pay. These records are frequently the employer’s first line of defense in a wage and hour lawsuit.
Excellent records can stop a claim cold. In the same way, incomplete or inaccurate records can leave an employer practically defenseless. For example, where the number of hours worked is disputed in a lawsuit, a court may be left to rely on the testimony by the plaintiffs-employees and former employees about how many hours they worked. Without good records, the employer may be unable to challenge the imaginative testimony of opportunistic plaintiffs.
3. Employee Interviews
In wage and hour lawsuits, employees often claim, sometimes accurately, that their employer’s actual day-to-day practices are different than the employer’s published wage and hour policies. For example, employees in one department may claim that they are frequently required to work during their lunch break, without extra pay, despite the employer’s policy providing for an unpaid lunch period. Employees in another department may claim that they frequently work late or before their start time without recording the extra work time.
It is therefore prudent to test the results of the employer’s FLSA compliance and record keeping audits by conducting structured interviews of a representative number of employees. The questions for the employees should be prepared in advance and designed either to identify specific wage and hour problems, or to confirm that those problems are absent. Such interviews must be designed and handled carefully so employees are reassured about their employer (as opposed to stirring up questions and discontent).
4. Conduct Appropriate Wage And Hour Training For Managers, Supervisors And Payroll
And Human Resources Employees
The employer should conduct appropriate training on any wage and hour issues identified in the compliance audit, review of record-keeping practices or employee interviews.
5. Implement, Publish And Maintain An Internal Wage And Hour Complaint Procedure
Employers should provide employees an effective procedure, within the company, to submit written complaints about wage and hour issues. Such a procedure can give the employer the opportunity to identify and correct mistakes or violations long before they fester into a lawsuit. The employer can also avoid misunderstandings by employees that can harm morale. Employees who file a wage and hour lawsuit without first pursuing the employer’s internal procedure may still be legally entitled to pursue their claims, but their failure to use the employer’s procedure will make their claims appear more suspect.
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