United States: Reducing The Risks Of Wage And Hour Lawsuits

Last Updated: August 13 2013
Article by Christopher J. Moran

During a recent 12-month period, more than 7,750 wage and hour lawsuits were filed in federal courts throughout the United States. This represents an increase of almost 10 percent over the number of cases filed during the preceding 12-month period, and Pennsylvania once again ranked among the top 10 states for such new lawsuits.

The proliferation of wage and hour lawsuits is due in part to the attractive features of such cases to plaintiffs and, perhaps more importantly, their attorneys. First, prevailing plaintiffs in such cases are typically entitled to recover their attorneys' fees and court costs. Second, a single lawsuit may include claims on behalf of numerous employees and/or former employees, and potential damages can be staggering. Third, the cost to an employer of defending a wage and hour lawsuit, particularly a class or collective action, can be substantial. For such reasons, employers may be more inclined to settle these cases. A recent survey by National Economic Research Associates found that during a five-year period the average wage and hour settlement in class or collective actions was $7.5 million and the average median settlement was $2 million.

It has been said that an ounce of prevention is worth a pound of cure. What follows are ways that employers can decrease their risk of wage and hour lawsuits, and strengthen their defenses should such lawsuits be filed.

Audit Any Workers Not Classified as Employees

Employers sometimes use the services of workers who are classified as independent contractors, interns or volunteers, and who are not paid wages or overtime. Employers should regularly review the classification of such workers to ensure that it complies with the criteria set forth in applicable regulations and court decisions and should consult counsel when necessary.

In recent years, the U.S. Department of Labor (DOL) began an initiative scrutinizing the use of workers classified as independent contractors in businesses such as hotels, restaurants, janitorial services, construction, landscaping and home health care. Most recently, the DOL began another initiative to scrutinize the use of such workers in Marcellus Shale-related businesses.

Unpaid internships are popular with employers and recent graduates as a way to obtain pertinent work experience. However, recent litigation in this area suggests that courts may be receptive to the argument that many workers classified as interns are actually employees entitled to wages. A recently court decision holding that Fox Searchlight Pictures improperly classified employees as interns has already prompted further litigation in this area.

Likewise, although federal wage and hour law recognizes a limited exception for individuals who volunteer their time to religious, charitable, civic or humanitarian causes, the DOL will scrutinize the use of that exception, and has also consistently rejected any suggestion that persons who work in a commercial setting for a non-profit entity (e.g. a thrift store) are exempt from the Fair Labor Standards Act.

Audit Any Employees Classified as Exempt

Employers often classify employees or groups of employees as "salaried" and treat those employees as exempt from the overtime provisions of federal and state law. Once again, it is important to regularly review the jobs being performed by those employees to ensure that they truly satisfy the requirements of federal and state law for such exemptions. Job descriptions, if accurate, can be helpful in making a rough, initial assessment. However, the actual duties performed by the employee are determinative. Also, employers should be mindful that the overtime exemptions under state law are not always identical to those under federal law.

Audit Payroll Practices – Do's and Don'ts

  • Don't permit "off the clock" work. If an employee works beyond their scheduled hours, they should be paid and, if appropriate, counseled not to do it again. Also, employers should consider requiring employees to certify the accuracy of their time records at the end of the day or week.
  • Do review any work-related time that is treated as unpaid. For example, employers should review unpaid time for putting on equipment or for job-related travel to ensure that such treatment satisfies both federal and state law.
  • Don't allow "comp time" instead of overtime. Private employers are not permitted to allow compensatory time off in lieu of overtime. Recent legislative efforts to allow such comp time (e.g., the Working Families Flexibility Act of 2013) are unlikely to become law anytime soon.
  • Do ensure proper calculation of overtime rates. Overtime rates for non-exempt employees must be calculated based on one and one-half times the employee's "regular rate." The regular rate may not be the employee's base hourly rate. Instead, it often must take into account commissions, bonuses, and other incentives paid to the employee.
  • Don't allow improper deductions from salaried employees. Improper deductions (e.g., deductions for certain absences) can destroy the exempt status of an employee, making the employee eligible for overtime.
  • Do comply with record-keeping and posting obligations. Federal and state laws require posting of notices and maintenance of payroll-related records.
  • Do adopt a payroll/overtime policy. An employer should have a written policy that confirms its commitment to comply with wage and hour obligations and provides a method for employees to report any types of wage claims. Employees should be familiarized with the policy, and managers should be trained about it.

Consider Adopting an Arbitration Agreement

Recent court decisions have favorably viewed well-drafted mandatory arbitration agreements that specifically prohibit employees from bringing their wage and hour claims on a class or collective action basis. Employers should strongly consider adopting such agreements to significantly decrease the attractiveness of wage and hour cases to plaintiff attorneys, and possibly decrease the possibility of such claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Christopher J. Moran
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