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Pay Them Now, or Pay More Later - Feb, 2008
Wage and Hour Litigation Against Employers Is On The Rise Over the years, employers have come to expect, prepare for, and defend against employment discrimination suits filed by current and/or former employees. However, in a surprising departure from the filings of the past, employers are now faced with a new strain of employee litigation: wage and hour litigation.
Employee lawsuits, often times brought by multiple plaintiffs, are now more likely to raise wage and hour complaints than employment discrimination issues. And this trend is only increasing. According to an annual report by Chicago-based law firm Seyfarth Shaw, wage and hour litigation pursued under the federal Fair Labor Standards Act produced more rulings in 2007 than any other type of workplace class action, and the pursuit of such litigation is expected to continue through 2008. See Seyfarth Shaw’s Fourth Annual Workplace Class Action Litigation Report: 2008 Edition. Moreover, in 2007, the 10 largest class-action wage and hour settlements totaled $319.3 million, compared with $282.1 million for the largest class-action employment discrimination settlements, the report said. Id.
In fact, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) recently announced its enforcement data for fiscal year 2007, highlighting significant increases in recent years. For fiscal year 2007, the WHD paid $220,613,703 in back wages to 341,624 employees. The 341,624 workers receiving recovered back wages is the second largest number since 1993, and the amount of those wages, $220,613,703, is the highest ever. That amount also constitutes a sixty-seven percent increase over the amount recovered in 2001.
As a result of this litigation trend, employers need to focus on their compliance with federal and state wage and hour laws in order to avoid becoming a defendant in the current surge of payroll practice litigation.
The Fair Labor Standards Act (“FLSA”) requires that employees receive overtime pay at the rate of time and one-half for hours worked in excess of 40 hours per workweek. In addition to the FLSA, many states have enacted statutes that provide greater protection to workers. Accordingly, employers must be aware of both federal and state overtime provisions.
The FLSA provides various exemptions from the general rule that employers must pay employees overtime rates for hours worked in excess of 40 hours per workweek. Moreover, some states have also enacted statutes providing additional exemptions. Pursuant to the FLSA, employees are generally exempt from overtime laws if they fall into one of the following “white-collar worker” exemptions: (1) executive; (2) administrative; or (3) professional.
The FLSA regulations set forth three specific requirements for determining whether employees qualify for the white-collar worker exemptions. The first criterion is a “salary-level” test, which requires an employer to pay an exempt employee a minimum of $455 per week. The second criterion is a “duties” test, which requires that the job must have as its primary duty the job functions described under one of the exemptions (usually related to management, supervision, or authority). The final criterion, the “salary basis” test, requires that an exempt employee receive his or her full salary for any week in which he or she performs work, without regard to the number of days or hours worked.
Many of the wage and hour lawsuits filed against employers are a result of one (or more) of the following issues: misclassification of employees as “exempt,” improper deductions from exempt employee paychecks, and improper payment of overtime to non-exempt employees.
Misclassification
Employees bringing misclassification claims are usually challenging an employer’s decision to classify them as “exempt,” and the employees assert that they should have received overtime compensation. When the FLSA was first enacted, an employer could fairly easily distinguish who in its workforce was a “manager” and who was a “worker,” such that it was clear which employees were exempt from the overtime regulations. However, as the economy shifted from manufacturing toward service industries, the lines between exempt and non-exempt employees has begun to blur. Thus, the multibillion-dollar question for employers is: who is exempt?
Typically, problems arise because employers mistakenly believe that a salaried “managerial” employee is automatically exempt under the FLSA and is therefore not entitled to overtime pay for working more than 40 hours in a given workweek. Misclassification arguments, therefore, usually focus on the second criterion of the FLSA exemption, the “duties” test.
Deciding whether or not employees qualify for an exemption can be a minefield for certain companies. While an employee may occupy a position that is titled “Manager” or “Assistant Manager,” frequently his or her job duties and responsibilities associated with that position do not qualify for one of the FLSA exemptions. This is a fact that companies, both large and small, must recognize. In fact, some of the largest class-action lawsuits, such as the Starbucks and Duane Reade litigations, have centered on the issue of whether or not their “managers” or “assistant manager” are truly exempt employees based on the nature of their job duties and responsibilities.
The legal standard for determining exemption is the actual duties performed by the employee, not his or her job description. Moreover, the burden falls on employers to prove that an employee is properly classified as exempt, regardless of intent.
The main problem for employers when faced with wage and hour litigation is that they do not possess time records for the employees that may be misclassified as exempt. This situation results in the court accepting the employee’s word as to how many hours he or she worked in a given week.
Improper Deductions
Under the old regulations of the FLSA, employers were able to make deductions from an exempt employee’s paycheck for things like damages to employment equipment, fines, or employee uniforms. The new regulations, and the interpretation of such regulations, change that process tremendously, even making some prior written authorized deductions unlawful.
The concept that underlies the new FLSA regulations is that paying white-collar employees a salary implies that they have discretion to manage their time. Thus, they are paid for the general value of their services, not the number of hours worked (which is the reason they are not entitled to overtime). The problem becomes that, subject to certain exceptions, exempt employees must be paid their full salary for any week in which they perform any work.
The exceptions to this deduction prohibitive rule are: (1) full-day deductions when an exempt employee is absent for personal reasons aside from sickness or disability; (2) deductions for absences of one or more full days because of sickness or disability if the deductions are in accordance with a bona fide plan, policy, or practice of compensating for loss of salary due to such sickness or disability; (3) offsets for jury fees, witness fees, or military pay; (4) penalties imposed in good faith for infractions of safety rules of major significance; (5) deductions for unpaid disciplinary suspensions of one or more full days if imposed in good faith for infractions of workplace conduct rules. In addition, payment of the full salary is not required for the first or last week of employment or when an exempt employee takes unpaid leave, but only pro rata for the time actually worked.
The DOL has taken the stance that “none of the exceptions listed contemplate charging the employees a fine for damage to or loss of company equipment.” See Wage & Hour Op. FLSA2006-7 (March 10, 2006). Further, “deductions from the salaries of otherwise exempt employees for the loss, damage, or destruction of the employer’s funds or property due to the employees’ failure to properly carry out their managerial duties (including where signed ‘agreements’ were used) would defeat the exemption because the salaries would not be ‘guaranteed’ or paid ‘free and clear’ as required by the regulations.” Id. The DOL also determined that either approach, making periodic deductions from employee salaries or requiring employees to make out-of-pocket reimbursements, would produce impermissible reductions in compensation.
The practical application of this prohibition is that if an employer makes an improper deduction from an exempt employee’s salary, the exemption may be lost. An employer could lose the exemption if there is a pattern and practice of making improper deductions and, as result, not paying employees on a “salary basis.”
Improper Payment of Overtime
Wage and hour litigation also frequently focuses on whether or not an employer has properly compensated its non-exempt employees for overtime hours. Employers are increasingly vulnerable to overtime claims under the FLSA, as well as state wage and hour laws, for “off-the-clock” work performed by employees.
Uncompensated so-called “off-the-clock” time frequently occurs when employers fail to pay non-exempt employees for work performed at certain times, such as travel time, lunch time, and training time.
The general rule of thumb is that time spent by a non-exempt employee in travel as part of the employer's principal activity must be counted as hours worked. While an employee’s ordinary commute time (home to work and back again) is not compensable, time spent by an employee in travel as part of their daily working activity, such as travel from job site to job site during the workday, is work time and must be counted as hours worked. Moreover, travel that keeps a non-exempt employee away from home overnight qualifies as work time and is compensable if it takes place during the non-exempt employee's regularly scheduled workday. This travel time qualifies as work time even if it occurs during the employee's corresponding working hours on nonworking days.
Under the FLSA and accompanying regulations, meal periods are generally compensable unless: (1) the meal period is at least thirty minutes; (2) the employee is completely relieved from all duties during the period; and (3) the employee is free to leave the duty post. Many courts have strictly interpreted these factors, holding that employees must be compensated if there is any possibility that the meal period will be interrupted for work duties.
Along the same lines, non-exempt employees who answer emails and calls outside of their normal work time may be eligible for overtime, as they are performing compensable work for which they should be paid. As neither employers nor employees tend to keep track of and document this type of activity, non-exempt employees tend to not receive overtime pay for this time. However, time spent emailing and making phone calls can certainly add up. As evidenced by a recent article in the New York Times, a non-exempt employee working for Oprah Winfrey’s production company submitted a time sheet documenting more than 800 hours in 17 weeks, which amounted to $32,000 in overtime pay.
Further, the FLSA requires that employees be compensated for all time spent in training programs, provided that the training is directly related to the job. Attendance at training programs and similar activities need not be counted toward working time (and thus are not compensable) only if the following four criteria are met: (1) attendance must occur outside the employee's regular working hours; (2) attendance must in fact be voluntary; (3) the employee must not do any productive work while attending; and (4) the program/training is not directly related to the employee's job.
The potential risks to employers for improper payroll practices are severe and given the scope of the damages, a class-action suit on FLSA grounds could be crippling to many employers. As wage and hour lawsuits are becoming an increasingly attractive target for plaintiffs’ attorneys, there is a heightened burden on employers to ensure that they are in compliance with both federal and state laws. Otherwise, employers will end up paying employees substantially more later.
For more information please contact Nicole J. Gray at 216.348.5418.
©2007 McDonald Hopkins LLC, All Right Reserved
This client alert is designed to provide current information for our clients, friends and their advisers regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal adviser before using this discussion as a basis for a specific action.
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