Avoid FLSA Class Action Suits – The best defense is a good offense:
Regular compliance audits of employee time and wages can proactively reduce legal risks for FLSA/over-time pay violations.
There has been a 77% rise in FLSA (Fair Labor Standards Act) lawsuits tied to wage-and-hour disputes since 2004 according to the National Employment Lawyers’ Association. As a federal law, it applies to all companies in all states, including Illinois. Plaintiff attorneys view FLSA lawsuits as promising and lucrative class action suits. Any unpaid time, no matter the amount, risks an FLSA lawsuit where the employee could recover $500.00 in unpaid wages but recover also $5,000 in attorneys’ fees from you.
No matter the size of the business, rest assured that creative plaintiffs’ lawyers somewhere are thinking about how to bring a FLSA action against your company. Don’t wait until you get a demand letter, a DOL auditor shows up on your doorstep, or you are served with a complaint to assess your risk profile and take remedial action. Create a good offense:build a credible FLSA compliance program, conduct regular audits (as outlined below), and take prompt steps to address any problems you find.
So what should a FLSA compliance audit look like? It should consist of 2 parts –reviewing your employee classifications (exempt vs. nonexempt, W2 vs. 1099) and reviewing your policies on hours worked and actually paid. This article will consider Part 1.
Audit to Identify Employee Classifications
Much of the FLSA litigation involves low and mid-level employees classified as exempt from overtime pay. Keep in mind that just because an employer classifies a worker as exempt from the FLSA does not mean that a Court cannot overrule that classification – entitling that worker to awards for unpaid past wages and over-time.
Under the FLSA, the burden is on the employer to demonstrate the applicability of a particular overtime exemption to a specific job or set of duties, under both the “salary” test and the “duties” test. The former is easy to assess, but the latter requires a careful analysis. Most importantly, job duties change over time due to business reorganizations, the addition or modification of controls, or technological innovation—so make sure to reassess classification decisions every few years. Given the FLSA statute of limitations is two years (three of the violations are willful), an employee’s job duties may change over time and the employee may obtain new duties and responsibilities. Therefore, it is possible this same employee could be exempt in 2015, for example, but as his job duties change, non-exempt in 2016 and 2017. A regular audit of employee’s classifications and written job descriptions will reduce the possibility of needing to re-classify a particular employee early and therefore before he or she is underpaid for months or years.
Don’t forget to consider whether any of those 1099s are actually W2 employees. Incorrectly classifying an employee as a 1099 can lead to FLSA claims for unpaid overtime and withholding.
Your Take away – review those job descriptions and if you don’t have written job descriptions now is the time to write them.
Audit of Employee Work-Time and Over-Time Hours
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- What is “Off the Clock” Work
An audit is an excellent investigative tool to determine how much “off-the-clock” time is occurring and why it is occurring.
One of the biggest problem employers generally face is failing to identify small amounts of “off-the-clock” work-time which, when viewed collectively among all employees, become large amounts of work-time. For manufacturers, that could be an employee arriving ten (10) minutes early to set up critical tools at his work-station before his schedule shift-start. In an office setting, it could be the few minutes an employee takes to upload new software updates or listen to voicemail before the start of her work-day. Work that benefits an employer, even for such mundane acts, is normally compensable and must be paid under FLSA.
With so many companies embracing new technology, employers face many potential “off-the-clock” pitfalls in the form of an employee using smart-phones, laptops and other WIFI devices. Some companies avoid off-the-clock work by prohibiting non-exempt employees from using their own, private devices during off-hours, or at all. Other companies issue company owned wireless devices to not only allow usage but allow monitoring to manage off-the-clock work performed. An audit will best identify how much and for what purposes these off-the-clock communications occur and if excessive, limiting such off-the-clock communications. In addition, the audit can benefit a company’s bottom-line by eliminating unnecessary or redundant work that offers no short or long term benefit.
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- What is the “Regular Rate of Pay”.
Many employers miscalculate the regular rate of pay (from which the overtime rate is derived) by excluding various forms of non-salary compensation. FLSA does not calculate regular rate of pay based solely on hours worked on the job – other factors are included. The FLSA states that all remuneration must be included in calculating the regular rate of pay unless it fits into one of several specific statutory exceptions. Exceptions include: gifts; payments not for hours worked, such as receiving payment on holidays and vacation time but not actually working on those holiday or vacation days taken; some discretionary bonuses; profit-sharing or savings plan contributions, employee benefit plan contributions, premium rate payments, and certain stock grants.
These limited exceptions don’t include a broad range of other forms of compensation, including but not limited to those which must be included under the FLSA’s pay calculation:
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- unrestricted cash payments under a cafeteria plan,
- employee referral awards,
- shift differential pay,
- restricted stock grants,
- “gross-up” amounts (meant to cover the employee’s tax burden),
- payments for sick-leave not used for being actually sick but exercised by an employee as a cash payment to him/her,
- relocation stipends.
- Doesn’t my payroll processor catch this?
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Auditing of employee time and wages is especially necessary when a company uses a payroll processing company, such as ADP and Paylocity. Remember, a payroll processor simply cuts checks based on the raw employee data a payroll manager inputs into their system. Many companies assume that a payroll processor will cross-check employee time for accuracy of wages earned when, in reality, that service may not be in your contract. So, if you have been utilizing a payroll processor for months, or even years, without conducting an employee wage and time audit, performing an audit is even more critical as you may unknowingly have numerous under paid employees who will have the right to sue to collect their unpaid wages.
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- What’s my exposure?
The statute of limitations for a FLSA claim can be two or three years, depending on the facts of a case. So regular audits can help minimize your exposure.
Keep in mind that when employees violate the rules by failing to report all time worked, or by failing to obtain advance approval of overtime work, you still must pay them for all hours worked even while you discipline them for violating the rules.
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- Summary
Audit, Audit, Audit! Don’t rely on your payroll provider. Make sure you are up to date on what “off the clock” time means and keep your time tracking policies in compliance with the law.
Should you have any questions about employees working overtime or any other law that may affect the operation of your business, please contact Waltz, Palmer & Dawson, LLC at (847) 253-8800.
Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Business Immigration, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.
This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.