United States: 10 Lessons Employers Can Learn From FLSA Lawsuits

The volume of collective actions brought under the Fair Labor Standards Act ("FLSA") against large and small companies has reached a dizzying level, up more than 400% in 20 years, and up 5% since April 2014. Plaintiffs' lawyers may have cut their teeth on smaller companies, but they have now found high value cases among the nation's largest employers. No industry segment or job category has been immune. Everything about worker pay has been challenged. Even lawyers have tried unsuccessfully to become plaintiffs in FLSA cases. So why do the lawsuits continue in companies that have qualified human resources professionals and in-house counsel? Lack of knowledge and low pay can't be the answer. Instead, it may be that employers complacently think, "This can't happen to me."

The general nature of the actions, size of the classes and the amount of the settlements should jolt general counsels, vice presidents of human resources, CFOs, and CEOs out of their comfort zones. In its simplest form, the FLSA requires employers to pay employees minimum wage and overtime at one and one-half the regular rate of pay for all hours worked over forty in a workweek. Keep in mind that work time and paid time (holidays and vacations) are different. The permissible exemptions from these requirements are far narrower than employers may want to believe. Litigation is bringing some costly clarity. Here are some lessons to be learned:

  1. Lowe's human resources manager lawsuit: The test for an exemption has nothing to do with an employee's job title. The regulations focus instead on the employee's primary job duties. A human resources manager or any other manager that does not exercise independent judgment and discretion, supervises no employees, makes no decisions, and whose recommendations are not given substantial weight, will be unlikely to meet any test for exemption from the FLSA's minimum wage and overtime requirements. The case (Lytle v. Lowe's Home Centers, Inc.) settled for $9.5 million dollars for more than 880 opt-in members. The case was filed in August 2012 and settled in August 2014. The court eventually approved a settlement of $3.3 million with $1.9 million for attorney fees. The lesson for employers: Look carefully and objectively at employees' job duties, not just their titles; and be sure their job descriptions match their duties. Misclassifications can cost big money.
  2. Restaurants and tip pools: Tips belong to employees. Keep in mind that the law allows the public to pay a portion of your operating costs. Guard this privilege and respect the requirements. You cannot take away a server's tips unless you have a valid tip pool that is fully explained to those who receive tips and you ensure they understand how the tip pool works. Every person who works in the restaurant is not entitled to tips and cannot share in the tip pool. Failure to properly utilize the tip pool provisions means that you lose your tip credit. That's right, you have to go back and pay your servers minimum wage. The lesson for employers: Be sure you have a valid tip pool that is properly administered.
  3. Restaurants and uniforms. Even though the public pays part of your wage costs, neither your customers nor your employees are responsible for ensuring that your employees wear the uniform you choose. The lesson for employers: Provide a basic uniform and allow your employees the option of purchasing additional uniforms.
  4. Regular rate of pay: An employee's regular rate of pay includes all payments made by the employer to or on behalf of the employee (except for certain statutory exclusions). An employee's regular rate of pay is determined by adding together the employee's pay for the workweek and all other earnings and then dividing that total by the number of hours the employee worked in that week. This calculation may involve bonuses, incentive payments, etc. The lesson for employers: Be sure you calculate the correct rate of pay when paying overtime.
  5. Theft: Do not steal your employees' wages. Even if you believe your employees owe you money, you do not have the right to make deductions that would cause their pay to drop below minimum wage. When employees work, they are entitled to be paid. A unilateral deduction may be called theft! The lesson for employers: Implement a policy that advises employees that monies owed to the employer may be deducted from accrued leave or advise employees that the employer may reduce their hourly rate to minimum wage if money is owed. Be mindful of any contractual provisions regarding employee pay.
  6. Bonus and incentive plans: If you pay a bonus to your non-exempt employees, be sure you understand and properly administer the plan. The lesson for employers: Determine whether the plan is discretionary and what period of time the plan covers. Be sure to consider any payments made under the plan when calculating the regular rate of pay for overtime purposes.
  7. Pay your employees for all their work time: When you work, you want to be paid. So do your employees. Any money you might save by requiring your employees to clock out before they finish their job duties will easily be lost when those employees' well kept records show the time they actually worked, their supervisors' knowledge of that working time, and the time their supervisors told them to clock out. The lesson for employers: Establish an accurate and effective method of recording your employees' work time. If your records consist of paper time sheets showing the same arrival and departure times each day, be sure your check book is handy.
  8. Automatic deductions: Don't make automatic deductions from the number of hours your employees work, even if they take regular breaks. In one case, the Carnegie Deli in New York paid 25 employees more than $100,000 each to settle an automatic deduction case. The lesson for employers: If your employees take regular breaks, say for lunch, have them clock in and out to reflect that fact, otherwise they may be deemed to have worked without a break.  
  9. Compensatory time off: Private employers can run afoul of the FLSA by giving non-exempt employees compensatory ("comp") time off in future pay periods rather than paying them overtime. Comp time is available to public employees but not private employees. The lesson for employers: If you are a private employer, you should not have a compensatory time policy. You can flex employee time within the same workweek only, not a future one; you should not grant comp time. If you are a public employer and institute a comp time program to save on the outlay of overtime dollars, the comp time must be awarded at a rate of one and one-half hours for each hour of overtime worked. 
  10. A fresh perspective on job classifications: An employer's internal review of its job classifications may be clouded or skewed by past assumptions about employees' job duties and titles. Employees may also be attached to the concept of being a "salaried employee." The lesson for employers: Give serious consideration to the need for an external audit of your job classifications. Your employees will lose the attachment to the concept of being salaried when they receive a paycheck that includes overtime based on the actual hours worked.

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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Linda Bond Edwards
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