Wage and hour lawsuits are big news these days. Jury verdicts and settlements capture headlines warning of damages and fees totaling seven or more figures, and class certifications in pending cases exponentially expand the risk posed by a single miscalculation or mistaken designation. How can employers best reduce the risk of becoming the next cautionary tale in wage and hour compliance?
Generally, the Fair Labor Standards Act (“FLSA”) requires employers to classify employees as either exempt or non-exempt for purposes of minimum wage, overtime and recordkeeping requirements. See 29 U.S.C. sections 201-219. Employers must pay non-exempt workers at least a minimum hourly rate for each hour worked, must pay overtime in an amount of one-and-a-half times the regular hourly rate for all hours worked over 40 per week, and must maintain an accurate account of all hours worked for at least two to three years. State and local laws on these topics vary, and employers must abide by whichever requirements are the most restrictive. By contrast, exempt employees do not receive overtime pay and their employers need not keep track of actual hours worked.
Below are four common mistakes with potentially serious consequences illustrated by today’s headlines:
Identify Employees Based on Economic Reality, Not Titles or Labels
As a threshold matter, FLSA applies to “employees” but not to independent contractors or volunteers. In today’s gig economy, this distinction is crucial. The economic reality behind a working relationship governs whether workers are correctly identified as “employees” in the first instance, including:
- Whether the services rendered are an integral part of the principal’s business;
- Whether the worker exercises independent initiative and judgment in a freestanding enterprise operating in an open and competitive market;
- Whether the worker has invested in facilities and equipment;
- Whether the worker is subject to another’s direction and control;
- Whether the worker incurs profit or loss on work performed.
No one of these factors is dispositive. However, courts and the Department of Labor alike examine the economic reality behind the four corners of documents that purport to establish an independent contractor relationship. It is not enough that workers have the appearance of independence through contracts, LLC incorporations, and taxation on a 1099 basis.
Classify All Employees, Both Exempt and Non-Exempt
Those properly identified as “employees” must next be correctly designated as either exempt or non-exempt for FLSA purposes. To classify an employee as exempt, an employer must be able to demonstrate that the job satisfies a minimum salary threshold and that its primary responsibilities are one or more of the following:
- The professional exemption, involving work “requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of intellectual instruction”;
- The administrative exemption, involving office or non-manual work directly related to management or operations requiring discretion and independent judgment on significant matters;
- The executive exemption, involving management of an enterprise, including discretion and authority in hiring, firing, promoting, and directing the work of others;
- Miscellaneous exempt positions, such as computer system analysts, outside sales representatives, and certain highly compensated white collar employees.
Each of these standards must be met by reference to the actual responsibilities of the employee, and not to the job title, job description or qualifications of the employee.
Keep Accurate Attendance Data for All Non-Exempt Employees
Prevailing plaintiffs on FLSA claims may recover unpaid overtime and liquidated damages for at least the two years prior to the date of the claim, plus attorney fees and costs. However, this timeframe extends to three years if the evidence establishes that the employer’s conduct in the misclassification was “willful” or reflected “reckless disregard.” Adding to that risk is (1) that of an adverse inference in the number of overtime hours actually worked, if the employer did not record and retain hourly records for mis-classified employees, and (2) that an exponential multiplication of damages may result if relatively small claims aggregate in a class action.
Unpaid overtime may accrue in unexpected ways that may appear to be miniscule but that when aggregated over an entire workforce may result in significant liability. Examples include reviewing and acting upon off-hours email transmissions, responding to assignments during breaks, or performing work-related tasks either prior to clocking in or subsequent to clocking out.
Train All Employees to Observe FLSA Requirements
Both exempt and non-exempt employees should receive training in the basic requirements of the FLSA. For exempt employees, particularly those with responsibility for directly managing the work of others, this means respecting time before, during, or after working hours for which the employee is not paid. Non-exempt employees with remote access to employer computer systems or e-mail via work or personal communication device may perform compensable work not captured by the company’s timekeeping systems. Additionally, management-level employees must enforce the company’s timekeeping policies and practices vigilantly, e.g., punching in and out for lunch, ensuring no compensable work is performed off the clock, and so forth. Minutes per day of uncompensated time will add up to hours over two or three years, and may quickly escalate if uncompensated time multiplies across an entire workforce. Similarly, non-exempt employees should receive training in policies with multiple avenues of internal redress so that misunderstandings do not go unremediated until yet another wage and hour lawsuit hits the headlines.
In short, the best way to avoid small mistakes from escalating into significant FLSA liability is to take the foregoing proactive compliance steps.