You are here


Wage and Hour Lawsuits: Potential Major Liability for Most Employers

November 14, 2012

Many employers are shocked when they see how quickly a single complaint by an employee for unpaid overtime can turn into a major collective action lawsuit under the federal Fair Labor Standards Act (FLSA) and state labor laws. Unlike claims of discrimination under Title VII, the employee is not required to first file with an administrative agency.

The final cost of the case bears only a tangential relationship to the actual seriousness of the violation. This is because an error—even one made in good faith—carried on for many weeks can result in significant cost. In addition, the employer will also likely be required to pay plaintiffs’ attorney fees in addition to the company’s defense costs.

Although recent court decisions have placed some limitations on how broad a collective action may be, plaintiffs’ attorneys can still easily move from the single cases of one or two employees to a joint lawsuit by a large group. Such expanded actions, state statutes that impose greater requirements for employers than the FLSA, and the lack of accurate time recording and reporting by some employers have contributed to the massive increase nationwide in class action overtime lawsuits in the past several years. Allegations of misclassifying employees as exempt from overtime and not paying for all work performed continue to result in multimillion-dollar settlements and verdicts against employers.

Why Are So Many Violations Occurring?

Even though the FLSA was originally passed in 1938, many subsequent interpretations, U.S. Department of Labor (DOL) opinion letters and court decisions have shaped how the statute is applied. To make matters more complex, the conditions under which work is done today are very different than the conditions under which work was done in 1938. Often, “real life” is vastly different from how a typical employer might interpret the regulations applying everyday logic. Nevertheless, the basic provisions of the FLSA remain the same: payment of at least the minimum wage, payment of overtime for hours worked over 40 in the work week, and accurate recordkeeping of time worked and minimum age worker limitations. Exemptions, however, are what usually get employers into trouble.

Under the FLSA, exemptions can be viewed in the same manner as tax deductions. They have to clearly meet the regulations and must be adequately documented. Further, very few black-and-white answers exist and, particularly with regard to exemptions, a decision is very fact-specific. For example, a job title of assistant manager may meet exemption requirements in one company in a given industry but not meet them somewhere else.

How Does the Bill Get So High, So Fast?

Employers are entirely responsible for complying with the FLSA and applicable state laws. Employees have no responsibility whatsoever and cannot waive their rights under the FLSA.

The employer is at fault for any violation, no matter how small, and the employee is entitled to bring suit. If the employer is found wrong, the plaintiff (employee or ex-employee) will be entitled to back pay for up to three years or as far back as the violation occurred, whichever period is shorter. The plaintiff will receive liquidated damages equal to the amount of back pay, and the employer will be required to pay plaintiff attorney fees as well as its own defense fees. Most wage and hour lawsuits are settled before trial, however, because the likelihood of the employer winning at trial is very small. Even if the employer does win, the undoubtedly huge costs make it a poor financial decision to pursue the suit through trial.

Consider this example. An employer misclassifies three jobs and pays no overtime for three years. The employer has no time records for these employees. Employees worked an average of only two hours of overtime per week, but “frequently” worked through their 30-minute lunch period. The average annual salary for these employees is $35,000. The number of employees (3) times 2.5 hours per week times 156 weeks equals 1,170 hours of overtime. At an overtime rate of approximately $25 per hour, the total is $29,250. Double that amount for liquidated damages, and the cost is nearly $60,000. Adding in plaintiffs’ attorney fees of at least $30,000 and a comparable amount for defense costs, and the total is upwards of $120,000! All this financial liability flows from the misclassification of only three jobs.

Unfortunately, wage and hour claims generally are excluded from employment-practices liability insurance policies, so employers are left to foot the entire bill of lawsuits. As a result, the only way to minimize exposure is through extensive monitoring of pay practices and processes that are reviewed by an expert and supported by education and training within the organization.

How Bad Is It?

More than 7,000 collective actions were filed in federal court in 2011 alleging wage and hour violations under the Fair Labor Standards Act, an increase of approximately 400 percent since 2000, according to the Administrative Office of the United States Courts. Sadly, the pace shows no sign of slowing. Plaintiff and defense attorneys agree that wage and hour issues are the leading exposure right now for employers in the United States, even more than employment discrimination. In 2010, the 10 largest private wage and hour settlements totaled nearly $364 million, 44 percent more than the 10 largest settlements in 2008. States with the most significant growth in wage and hour litigation are California, Florida, Illinois, Massachusetts, Minnesota, New Jersey, New York, Pennsylvania and Washington.

Under the FLSA, a complaint can easily move into a collective 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 has resulted in a dramatic increase in the number of cases against California employers alleging missed meals and rest periods. Plaintiffs’ attorneys are finding it relatively easy to identify employers who are not keeping accurate records of meal breaks.

What Can My Company Do to Protect Itself?

Companies seeking to avoid wage and hour lawsuits and the associated financial liability should take two important steps. First, they need to ensure that all exemptions claimed meet the regulatory requirements. Second, they need to accurately record all hours worked by nonexempt personnel.

Clear policies and procedures that detail the company’s payroll practices and time-reporting obligations also are essential. In addition, employers must provide a defined process for employees to bring forth compensation questions or complaints, including errors, misclassifications or calculation of time worked.

F&H Solutions Group can conduct a detailed review of client practices with regard to FLSA and state requirements for employers and identify problem areas before they become the basis for a lawsuit. Our firm can help companies avoid costly litigation by helping to ensure wage and hour compliance. For more information, please contact Joe Godwin.