AWAKENING A SLEEPING GIANT: THE RESURGENCE OF WAGE AND HOUR LITIGATION

By Eric H. Joss and Peter Rukin

INTRODUCTION

$90 million. One of the largest California employment verdicts in recent memory. Was it for race discrimination? No. Sex harassment. No again. The verdict was handed down in a wage and hour suit brought by insurance adjusters who claimed they had been misclassified as exempt from the payment of overtime.

A new type of lawsuit—“the wage and hour class action”—has exploded onto the legal and human resources scene during the past two years. A relative rarity just five years ago, lawsuits for unpaid (or improperly calculated) wages and overtime pay are now flooding courts across the country. In 2001, for example, the number of federal wage and hour cases actually exceeded the total number of equal employment opportunity lawsuits brought during the same time period.[I]

What is responsible for this increased litigation, what are its implications for employers, and what steps can human resources professionals take to avoid becoming the next target? Knowing the answers to these questions may be crucial to avoid becoming the next footnote—or headline—in one of the major employment stories of the year.

AN OLD LAW IN A NEW ECONOMY

The Fair Labor Standards Act (FLSA), enacted by Congress in 1938, was designed to guarantee the “blue collar” workers of the 1930s and 1940s basic minimum wage and maximum hour (i.e., overtime) rights. Many states soon enacted similar legislation. These “wage and hour” laws divided the workforce in two—exempt and nonexempt—with the most significant categories in the former classification consisting of exempt professionals; exempt administrative employees; and exempt managers (called “executives”).

The FLSA engendered a torrent of litigation, as employer classification decisions and pay practices were challenged in the courts. The 1930s and 1940s saw literally hundreds, if not thousands, of such lawsuits. But by the 1950s, the number of wage and hour suits had slowed to a trickle, and remained at a more or less consistent level until the late 1990s.

At least four factors have contributed to the recent resurgence of litigation—and in particular class action litigation—in the wage and hour arena.

First, the new economy has created a wide range of jobs—particularly in the technology sector—that did not exist when the FLSA was enacted. Properly classifying these workers has been a challenge for some employers.

Second, developments at the state level—in the courts and legislature—have helped fuel the wage and hour litigation explosion. California is only the most obvious example. As noted above, a recent California court decision finding that insurance adjusters are properly classified as nonexempt employees because they perform production work has led to a spate of class action suits for unpaid overtime wages.

Third, courts in the 1990s generally made it more difficult for plaintiffs to obtain class certification in traditional equal employment opportunity suits, such as those involving race and gender discrimination claims. In this regard, employers have been victims of their own success; as courts have raised the bar for plaintiffs seeking class treatment in EEO cases, in many instances plaintiffs’ lawyers have found courts more receptive to certifying wage and hour suits as “class” or “collective” actions.[II]

Fourth, many plaintiffs’ lawyers have figured out that their greatest nemesis in EEO litigation—the summary judgment motion—is often a bit player on the wage and hour stage. For example, where the case turns on the nature of the employee’s job duties, the employee’s own testimony describing his or her duties as nonexempt may diminish the employer’s chance of obtaining summary judgment, leaving trial as the next stop on the litigation train.

OVERVIEW OF THE FLSA

While the FLSA establishes the “baseline” wage and hour protection for all workers in the United States, many of the individual states also have their own minimum wage and maximum hour laws. These individual state laws provide employees with protections equal to or greater than those available under federal law. Employers must follow the dictates of whichever law, in a particular instance, provides workers with the greater protection. Accordingly, it is very important to be familiar with both federal and applicable state law.

THE EXEMPTIONS

An employee is presumed to be covered by the FLSA—and the beneficiary of its minimum wage and maximum hour protections—unless the employer can establish that the employee is exempt from the law’s minimum wage and maximum hour provisions. In this regard, the law is unimpressed by lofty titles and paper job descriptions. The burden of proving an exemption is on the employer, and the courts tend to construe the exemptions narrowly in favor of the employee.

As noted above, the FLSA recognizes three “white collar” exemptions for executive, professional, and administrative employees, as well as a myriad of exemptions—too numerous to name here—for various categories of employees, ranging from commissioned employees and outside salespersons to truck drivers and egg buyers to certain agricultural workers and motion picture theater employees.

The white collar exemptions encompass the plurality of exempt-classified employees. They only apply to employees who are paid on a salaried basis, meet the minimum salary requirement,[III] and satisfy the following tests applicable to each exemption (where an employee earns less than $250 per week, the employer must meet certain additional requirements not identified here).

The Professional Exemption. In order to qualify as an exempt “professional” employee, an employee’s primary duty must (1) consist of work requiring invention, imagination, or talent in a recognized field of artistic endeavor; or (2) include work which requires the consistent exercises of discretion and judgment and which also consists of (a) work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study or (b) teaching, tutoring, instructing, or lecturing an employee of a school system or educational establishment or institution.

Exemptions for Computer Professionals. Certain highly trained computer professionals—i.e., those involved in actually developing and designing software, hardware and computer systems—may also qualify for the professional exemption. However, many computer technicians—including those who operate, repair, and troubleshoot computers or support end users—likely will not qualify for the professional exemption.

Exempt Executive Employees. An employee may qualify as an exempt “executive” employee if: (1) his or her primary duty consists of managing the enterprise or one of its customary departments or subdivisions; and (2) he or she customarily directs the work of at least two other employees.

Exempt Administrative Employees. An employee may be considered exempt as an “administrative” employee if (1) the performance of his or her primary duty includes work requiring the exercise of discretion and independent judgment; and (2) his or her primary duty consists of either (a) the performance of Office or nonmanual work directly related to the management policies or general business operations of the employer or its customers, or (b) the performance of certain work in a school or university system.

If an employee is exempt from the minimum wage and maximum hour protections of the FLSA, his or her salary is deemed compensation for all hours worked. Nonexempt employees, on the other hand, must be paid for all the time they are “suffered or permitted” to work. While the precise rules must be checked in each instance, this generally includes any time that is controlled by the employer, such as training time, short rest or break periods, working meal periods, waiting time, controlled on-call time, and some types of travel time. It also includes time during which work was performed without the approval of the employer if the employer either knew or should have known that the employee was working.

COMPUTING THE REGULAR RATE

The FLSA further provides that nonexempt employees generally must be paid at a rate of at least 1 ½ times their regular rate of pay for all hours worked over forty each week.[IV] In order to calculate overtime pay due an employee, an employer must first determine the employee’s “regular rate of pay” for the pay period in question. The regular rate generally includes all compensation paid to a nonexempt employee, including hourly earnings, salary, piecework earnings, commissions, “non-discretionary” bonuses, and the value of meals and lodging. For hourly employees whose only compensation is based on an hourly rate of pay, the regular rate is the hourly rate. However, if an hourly employee also receives other compensation (such as a bonus or standby pay), the regular rate is determined by dividing the total compensation by the total number of hours worked on that workweek. This calculation may seem straightforward, but it can be complicated. For example, employers must apportion non-discretionary bonuses paid less often than weekly over the weeks to which they pertain. Overtime for salaried, nonexempt employees may be determined by dividing the weekly salary by the number of hours which the salary is designed to compensate.

Familiarity with the text of the FLSA alone is not sufficient. There are extensive—and notoriously intricate—federal regulations interpreting the FLSA. of course, state laws and regulations add an additional level of complexity to the equation. For example, California does not follow the FLSA’s “primary duty” test for the white collar exemptions; rather, an employee is exempt only if he or she is “primarily engaged in” (i.e., spends more than fifty percent of his or her time actually performing) exempt work in that workweek. The implication of this different test is significant for California employers: two employees with the same job title and set of responsibilities may need to be classified differently—that is, requiring resort to non-exempt classification that would not be necessary under the FLSA. . While the effect of local legislation may not be so dramatic in other states, an employer must be familiar with all applicable wage and hour laws.

THE NUTS AND BOLTS OF FLSA LITIGATION AND EXPOSURE

And what happens when an employer fails to comply with the FLSA? The U.S. Department of Labor (DOL) may sue to enjoin any unlawful practices as well as recover unpaid wages on behalf of affected employees. But aggrieved employees need not wait for the DOL to act on their behalf; unlike most EEO laws, the FLSA gives employees the right to proceed directly to court without exhausting any administrative remedies.

Once in court, an employee may ask that notice of the action be sent to similarly situated employees, who then have the right to “opt-in” (i.e., join) the action. Unlike many other types of cases, an FLSA action can only proceed on behalf of persons who have expressly joined the lawsuit by filing a “consent” form. of course, plaintiffs’ lawyers often prefer the traditional “opt-out” class actions (where employees are considered part of the lawsuit unless they expressly exclude themselves from the lawsuit) because it increases the size of the potential class. Not surprisingly, therefore, plaintiffs have increasingly brought claims under state wage and hour laws which allow for certification of “opt-out” classes with respect to the state law claims.

An employer found liable for failure to pay wages in violation of the FLSA may be required to pay the back wages owed to the employee plus an additional equal amount as liquidated damages. These liquidated or “double” damages are considered compulsory rather than punitive in nature, and are therefore “presumptive.” An employer may only avoid them by showing “by plain and substantial evidence” that it acted with subjective good faith and objective reasonableness in failing properly to compensate his employees. This can be a heavy burden; not surprisingly, courts have found that “double damages are the norm, single damages the exception.”[V]

Under the FLSA, an employee may only recover for unpaid wages during the two years prior to date he or she filed an FLSA claim in court. That period may be extended to three years if the employee is able to show that the failure to pay wages was “willful,” that is, that the employer “either knew or showed reckless disregard for the matter of whether its conduct was prohibited” by the FLSA. Because willfulness often cannot be determined until trial, as a practical matter employers should assume (but not concede) that the employee(s) will be able to reach back three years. State laws may also provide workers with more protection; for example, New York allows employees to recover unpaid wages covering a six year period, regardless of whether the employer’s violation was willful.

of course, driving much of the litigation is the employee’s right to recover attorneys’ fees. The FLSA as well as many state laws require an award of attorneys’ fees and costs to the employee if the employee prevails on his or her claims. The judge has little discretion in the matter.

The numerous presumptions in favor of employees under the FLSA, the potential for collective action designation, and the mandatory attorneys’ fee award may make settling FLSA claims out of court an attractive proposition. But that is easier said than done. The U.S. Supreme Court has suggested—and at least some courts have decided—that an employer may not settle the case once it is filed without obtaining the approval of the DOL or the judge overseeing the suit.[VI] And, any DOL or court-approved settlement may need to include a reclassification of the employee as nonexempt (to avoid repeat litigation). of course, as a practical matter, any reclassification must include all similarly situated employees, which creates the risk that other employees may inquire about the change and thereafter seek to recover back wages for the period prior to the reclassification.

FOUR PROBLEM AREAS: MISCLASSIFICATION OF NONEXEMPT WORKERS; OFF-THE-CLOCK WORK; IMPROPER DEDUCTIONS; AND FORMULA ERRORS

MISCLASSIFICATION CLAIMS

The most common genre of wage and hour lawsuit involves challenges to an employer’s classification of workers as “exempt” from payment of overtime. The term “classification” is used here loosely; in many cases, the employer being sued never made a conscious decision to classify the employees in question as exempt from overtime pay. Indeed, the proper classification of the employee(s) is, all too often, first addressed after the lawsuit is filed. of course, by then, years of back pay liability have accrued, and resolving the case is an expensive proposition.

Misclassification cases come in a variety of forms, and, to a degree, may be industry specific. For example, retailers and service companies have been the target of numerous lawsuits alleging that store or unit managers are not truly (or consistently) functioning as “managers” and hence are not properly classified as exempt executive employees. In such cases, plaintiffs’ counsel will typically focus on the fact that these employees, while called “managers” or “assistant managers,” are actually performing essentially the same work as line employees, or are not solely responsible for managing two or more employees.

Also currently in vogue are suits challenging the classification of employees as administratively exempt based on the argument that the employees are actually engaged in production work rather than true administrative work. As noted at the outset of this article, the most well-known (or perhaps infamous) example was last year’s $90 million California jury award in Bell v. Farmer’s Insurance. While Bell was a state court decision, it was based on FLSA regulations which distinguish between production workers and administrative employees. Production workers make the goods or provide the services that are the “products” of an enterprise. Administrative employees do not produce “products;” they administer the production functions. Typical examples of administrative functions are HR, accounting and payroll. Although the circumstances in Bell were peculiar—the employees in question were found to be engaged in production work because they were insurance adjusters at a company whose business was insurance adjusting—it and other recent cases suggest that employers must be extremely careful about designating en masse large numbers of workers under the administrative exemption. The reason for the caution is that such blanket classifications may capture employees whose work is more production-oriented than administrative.

OFF-THE-CLOCK CLAIMS

“off-the-clock” suits are also common. In these cases, the issue is not whether employees have been designated as nonexempt—they have—but whether the employer is requesting or permitting employees to work hours that they are not recording on their timesheets. oftentimes, the proof of such violations is indirect. Plaintiffs frequently seek to establish a pattern of off-the-clock work by showing that the company penalized employees for not completing certain work within the normal eight hours on the one hand, but refused to authorize overtime on the other, leaving the employee with no choice but to work off-the-clock. Plaintiffs may also point to prior employee complaints regarding off-the-clock work, or the company’s failure to implement certain safeguards like time clocks, as proof that the company knew or should have known that employees were working off-the-clock.

The important thing to remember about off-the-clock work is that it may be compensable regardless of whether employees were instructed to work the extra hours. Indeed, it may be compensable even where the employer had a written policy prohibiting off-the-clock work and communicated that policy to its employees, if the employer knew or should have known that the work was in fact occurring.

IMPROPER DEDUCTIONS

Employers should also be vigilant about payroll deductions. Certain deductions—like those designed to shift business costs or losses from employer to employee—are illegal. Others are legal, but may carry grave consequences. For example, exempt employees must be paid on a “salary basis,” meaning that they regularly receive a predetermined amount of compensation which is not subject to reduction due to variations in the quality or quantity of work performed within a given week. Deductions of less than a full day for voluntary absences may result in loss of the exemption; private employers generally are prohibited from making deductions from an exempt employee’s salary for absences of less than one day, except in limited circumstances. Further, deductions from an employee’s weekly pay for compelled absences of less than a week due to lack of work may also result in loss of the exemption.

Steering clear of such improper deductions is necessary but not sufficient to avoid losing the exemption. An employer may lose the exemption even in the absence of any actual deductions, if it maintains a policy that creates a “significant likelihood” of such deductions, such as where the employer “‘effectively communicates’ that deductions will be made in specified circumstances.”[VII] In one case, for example, the plaintiff claimed that her employer had an unwritten policy of docking salaried employees’ pay if they were absent for part of a day and had used up their benefit hours, and produced evidence that such docking of pay had occurred on a total of eight occasions. According to the court, this evidence proved that the Company did not objectively intend to pay the employees on a salary basis, rendering the plaintiff (who had never suffered any deduction) nonexempt.[VIII]

FORMULA CLAIMS

Finally, courts have held employers liable for using the wrong formula to calculate employee overtime for nonexempt employees. This often occurs in connection with bonus payouts or piece rate work. “Production” bonuses and “nondiscretionary” bonuses (such as those based directly on attendance, individual or group production, or quality and accuracy of work or which are announced to employees to induce them to work more steadily or efficiently) must be included in calculating the regular rate of pay for overtime purposes. Similarly, in a production setting, employees paid for production must receive overtime for all units produced during overtime hours. Unfortunately, some employers have made the mistake of paying nonexempt employees a stated base plus “overtime-on-the-base” without paying additional overtime on the piecework or bonus. The FLSA requires that overtime be paid based on the “regular rate,” which is determined by dividing the total compensation (e.g., hourly rate plus bonus) by the total number of hours worked in that workweek. Overtime is then properly paid at time and a half the regular rate for all hours worked over forty during that pay period.

PRACTICAL TIPS ON HOW TO AVOID BECOMING THE NEXT WAGE AND HOUR VICTIM

Wage and hour litigation can be costly to defend, costly to resolve, and extremely disruptive to business operations. But there is good news: these cases are also quite avoidable. The following suggestions will help you assess your current payroll and classification systems and identify existing problems.

Conduct an Audit. Audit your workforce to ensure that you are properly classifying employees. This includes the following steps:

1. Develop a classification “checklist” for the three main exemptions, executive, professional, and administrative.
   
   
2. Complete the checklist on an individual-by-individual basis, if possible, rather than on a group-wide basis – duties of employees even with the same job title or general responsibilities may vary by location or supervisor.
   
   
3. The results should be recorded and saved. Record the employee’s name, title, primary job function, supervisor’s title, and the department, store, facility, or plant that the employee manages. Give specific examples of the primary duties in which the employee engages, the weekly hours spent performing each duty, and the employee’s monthly compensation.
   
   
4. Promptly correct any situations in which exempt employees are performing nonexempt tasks that should be performed by non-exempt employees only.

Don’t Get Caught in the “Primary Duty” Trap. Avoid the “primary duty” problem to the extent possible. This means:

1. For supervisory employees, make sure that job descriptions reflect that the individual manager is expected to spend most of his or her time on supervisory/managerial tasks, and not on the tasks of rank and file employees.
   
   
2. For professional and/or administrative non-supervisory employees, make sure that job descriptions reflect that their most important job duty (or duties) is exempt work and, if possible, that the job duty (or duties) is intended to occupy more than 50 percent of the employees’ time.

Monitor and Train Exempt Employees. Good job descriptions are not enough. In fact, they can backfire by providing you with a false sense of security. If you believe your classifications are correct, make sure your exempt employees are actually performing the work depicted in the job descriptions. Reemphasize to your exempt employees that they should be spending the majority of their time on exempt duties. If some are not, they may need retraining. Oddly enough, an unintended benefit of this process is that it often helps management identify poorly performing employees; they often are the ones performing to great a share of nonexempt tasks.

Don’t be Penny-Wise and Pound Foolish. Do not worry about the effect of reclassification on a potential lawsuit. If you identify misclassifications, correct them immediately so as to avoid accrual of further liability.

Design and Enforce Sound Time Recording Policies. Make sure nonexempt employees understand that they must truthfully and accurately report to the company all time worked, and that they will be disciplined for failing to do so. Follow through with such discipline when violations occur. Time clocks may be advisable in certain situations. Whether or not time clocks are used, consider having employees represent in writing that the time reported is true and accurate. Also, make sure that work expectations are in line with your overtime policy; demanding ten hours of work per day from an employee who is prohibited from working overtime may be a recipe for disaster.

Avoid Improper Salary Deductions. This is critical because no matter how careful an employer is with auditing the job duties of employees and making individualized assessments, improper salary deductions, by themselves, can destroy the exemption. Steps in protecting against this risk include centralizing (or more closely monitoring) payroll activity, and training management employees regarding the proper treatment of exempt employees.

Conduct a Policy Review. Review employee handbooks and other policy manuals to ensure that they comply with the overtime and minimum wage laws. Eliminate vague and unenforced policies that may jeopardize employee exemptions.

If Sued, Define Your Objective Early. If you find yourself on the receiving end of a wage and hour suit, early strategizing is essential. Consider the following steps:

1. Plan the long term strategy. Is it in the company’s best interest to settle early without incurring significant discovery costs? What are the chances of defeating plaintiffs’ motion for collective action designation? What are the chances of winning at trial?
   
   
2. Consider securing declarations from exempt employees to provide accurate information about primary duties and exercise of discretion and independent judgment. They and even their supervisors may be precluded from talking to you once a class action is certified.
   
   
3. Consider promptly engaging an expert consultant to study the jobs in question to ensure that they are exempt.

Finally, Seek Legal Advice When Necessary. Wage and hour laws and regulations are notoriously Byzantine, and legal requirements may vary significantly from state to state. If you have any doubt about whether you are properly classifying or compensating employees, the best advice is promptly to discuss your situation with legal counsel. Doing it right from the start is time and money well spent.

[I] Wage and Hour Report, March 29, 2002

[II] But the tide in favor of class certification recently may have shifted. Just this past April, the California Court of Appeal reversed a trial court’s decision granting class certification in a wage and hour case, finding that the differences in the work performed by managers in different stores precluded class treatment of plaintiffs’ claims. Sav-On Drug Stores, Inc. v. Superior Court, 97 Cal. App. 4th 1070 (2000).

[III] Currently $155 per week for the administrative and executive exemptions and $170 per week for the professional exemption.

[IV] There may be different requirements for employees covered by a collective bargaining agreement. See 29 U.S.C. Section 207(b).

[V] Brock v. Wilamowsky, 833 F.2d 11, 19 (2d Cir. 1987).

[VI] Lynn’s Food Stores, Inc. v. U.S. Department of Labor, 679 F.2d 1350, 1353 (11th Cir. 1982) (citing Schulte, Inc. v. Gangi, 328 U.S. 108 (1946)).

[VII] Auer v. Robbins, 519 U.S. 452 (1997).

[VIII] Whetsel v. Network Property Services LLC, 246 F.3d 897 (7th Cir. 2001).

Reprinted from HR Advisor: Legal and Practical Guidance, with permission of West.