10 Sure-Fire Ways to Get Your Company Sued Under the FLSA

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1 Law Office of Bert N. Bisgyer ATTORNEYS AT LAW SUITE 525 EAST 1025 THOMAS JEFFERSON STREET, NW WASHINGTON, D.C Telephone Facsimile November 16, Sure-Fire Ways to Get Your Company Sued Under the FLSA Background: The Obama Administration is Committed to Identify and Sue Employers Who Violate the FLSA. The Obama Administration is committed to the aggressive enforcement of federal labor and employment laws, including particularly, the Fair Labor Standards Act ( FLSA ). President Obama s federal budget dedicates $25 million to task the United States Department of Labor ( DOL ) to combat purported misclassification in two principal contexts: (1) employees who are wrongly deemed to be exempt from overtime; and (2) independent contractors who, in fact, are employees. This funding also will be used to finance State DOL efforts to combat misclassification. DOL s New Misclassification Initiative. President Obama s DOL Solicitor, Patricia Smith, has announced a Misclassification Initiative to obtain for misclassified employees the overtime pay that is available to a company s nonexempt employees. To that end, DOL has promised to identify and litigate against employers who misclassify as exempt from overtime those employees who do not meet the requirements of the white collar exemptions, set forth in Part 541 of DOL s Wage and Hour regulations, which implement the FLSA. In a recent (October 2, 2010) speech, Solicitor Smith declared that the Obama Administration would reverse the existing culture of non-compliance. She announced that DOL s new tactics for enhanced enforcement would include increases in criminal prosecutions, enterprise-wide and industry-wide enforcement actions, and liquidated damages in misclassification cases. DOL s Wage & Hour Division ( WHD ), which enforces the FLSA, has hired hundreds of investigators and other enforcement operatives to implement that initiative. WHD s enforcement staff has been increased by 28% in In short, DOL has greatly expanded its ability to investigate complaints and conduct audits of employers, and is aggressively pursuing that agenda. 1

2 Consequences of Misclassification. The consequences of misclassifying non-exempt employees as being exempt from overtime can be severe for employers. In addition to the costs entailed in defending DOL investigations, individual and collective actions covering misclassification are rapidly proliferating in the current environment. Enormous settlements have become the rule, and substantial judgments adverse to employers have become commonplace. At a recent conference held on October 19, 2010, DOL emphasized that it is supporting the proposed Employee Misclassification Prevention Act (HR.5107; S.3254), which would make misclassification a free-standing violation of federal law, while establishing a legal presumption favoring employee status. FLSA Collective Actions Are Now the Most Common of All Federal Employment-Related Class Actions, and the Failure to Pay Overtime is the Most Common FLSA Complaint. In addition to the employer s enhanced exposure to the likelihood of DOL audits and litigation under FLSA, the cost to employers and statutory penalties for failing to pay overtime that is due can be immense. For this reason, misclassification cases are particularly attractive to plaintiff s lawyers. As indicated, misclassifying employees may even subject repeat offenders to criminal penalties. Unions seize on misclassifications as evidence of the employer s purported mistreatment of employees to promote their organizational efforts. The Overtime Standard. Under the FLSA, employers are required to pay overtime compensation to all covered employees, for all hours worked in excess of 40 hours in a workweek (consisting of seven consecutive 24-hour periods), unless the employee is exempt from overtime. The overtime rate is one and one-half times the employee s regular rate of pay. Highly Paid Employees Have Joined the Ranks of FLSA Plaintiffs. A recent development of note is that employers are increasingly being targeted in individual and collective actions by employees holding traditional white collar positions. The financial services industry is a case in point in which highly compensated loan officers, financial advisors, stockbrokers, traders, and similarly situated personnel have brought collective actions against their firms claiming to have been misclassified as exempt administrative personnel or exempt highly compensated employees. These new plaintiffs frequently maintain that they are not exempt from overtime, claiming that they merely perform production-type duties for the employer. They emphasize their lack of (or infrequent performance of) management duties or involvement in strategic decision-making or analysis. They assert that their work is performed under strict guidelines that limit their discretion. Last year alone, massive settlements of such claims were agreed to by Morgan Stanley ($50 Million), Wachovia ($39 Million), and Prudential Financial ($11 Million), each lawsuit involving allegedly misclassified financial advisors, brokers, and other industry personnel. 2

3 These gigantic settlements, coupled with enormous litigation defense costs, underscore the dilemma facing employers when the FLSA - - a law which was created during the Great Depression - - is applied to employees in industries whose positions, duties, and responsibilities did not exist and were not contemplated when the FLSA was enacted. The anomalous result is that employees making hundreds of thousands of dollars annually in a variety of industries are now demanding unpaid back overtime and statutory penalties. The emergence of these new plaintiff groups, encouraged by activist plaintiff s class counsel, requires the careful attention of all employers. It is the Employer s Burden to Prove Exempt Status It is the employer s burden to prove that an employee is exempt from overtime. Mere declarations that track the language of a particular exemption will not be sufficient to disprove the assertions of a well-coached plaintiff-employee. Further, it should be anticipated that complaining employees will describe their duties and responsibilities in a manner that both minimizes both their managerial nature and the employee s discretion. Convincing evidence and documentation will be necessary to support the employer s contrary position. Note: Keep in mind that, under the law, exemptions from the FLSA s requirements are to be narrowly construed, in view of the FLSA s broad remedial purpose. 10 Sure-Fire Ways to Get Your Company Sued Under the FLSA - - Rely on the Following Myths Regarding the FLSA Overtime Obligation Consider the following sampling of commonly-held myths that regularly appear in FLSA litigation against employers for unpaid overtime. Introductory Myth: Since our Company has carefully evaluated the exempt status of its personnel, relying on official Opinion Letters issued by DOL s Wage & Hour Division, our determinations are lawful. FACT: In 2004, the FLSA s interpretive regulations governing white collar workers were revised for the first time in a half-century. This development was followed by DOL s issuance of Opinion Letters that were intended to clarify exempt duties in various industries, among other issues. Their purpose was to provide better guidance to employers. That guidance has now been eliminated by the Obama Administration s WHD, which, since January 2009, has formally withdrawn 18 Opinion Letters that were issued or proposed by the Bush Administration. The WHD has further announced that it will no longer issue fact-specific Opinion Letters in response to requests from employers. Instead, DOL s WHD states that it will issue Administrator Interpretations, which reportedly will have broader applicability. In its first Administrator Interpretation, the WHD reversed a 2006 Bush Administration Opinion Letter by holding that mortgage brokers were not eligible for the Administrative exemption. That Interpretation concluded that that exemption did not apply, because the brokers work was too closely related to the mortgage firms products and, consequently, was not administrative in nature. 3

4 In its second Administrator Interpretation, issued on June 10, 2010, the WHD ruled that time spent donning and doffing personal protective (safety) equipment (as opposed to clothing), prior to the start of working time, was compensable working time. Bottom line: Employers should anticipate that the Administrator Interpretations issued by the Obama Administration will narrowly construe exemptions or make them broadly inapplicable to particular employee classifications, while expanding the concept of compensable working time. Further, while reviewing courts are not bound by the WHD s Administrator Interpretations, employers who ignore Administrator Interpretations enhance their risk of legal exposure under the FLSA and state law. Myth #1: Since all Company managers are paid a salary, they do not qualify for overtime pay. FACT: Being paid on a salary basis does not suggest that the employee qualifies for exemption from overtime under the FLSA. Blue Collar workers, for example, can never qualify for exemption, no matter how highly paid they may be, and regardless whether they are paid on a salary basis. More fundamentally, being paid on a salary basis is but one aspect of the tests to qualify for exemption. An employer must show not only that it pays its exempt employees on a salary basis (as defined in the white collar regulations) of at least $455 per week but also that the individual s duties and responsibilities meet the criteria for one of the applicable statutory exemptions (e.g., executive, administrative, professional, outside sales, computer employees, or highly compensated employees, or other FLSA-recognized exemption from overtime). Myth #2: All Company employees having the job title of Vice President, manager, or supervisor are exempt from overtime. FACT: To the contrary, the regulations make plain that one s job title alone is insufficient to establish exempt status. To be exempt from overtime under the FLSA, the particular duties test and other qualification criteria specified for the exemption at issue must be met. Whether an employee qualifies for exemption, for example, as an executive or administrative employee, is a fact-specific inquiry to be determined on an individual basis. Merely labeling an employee manager, or granting an official-sounding title or a few supervisory or managerial functions does not qualify the employee for exemption. For example, for purposes of the executive exemption, the employee s primary duty must be managing the enterprise or a recognized department or subdivision thereof, and customarily and regularly directing the work of at least two full-time employees or their equivalent, while having the authority to make hire/fire decisions over other employees, and to make decisions as to advancement, promotion, and any other material change of status that are given particular weight. Consequently, a store manager who primarily performs routine duties under the close supervision and direction of a district or regional manager will not qualify under this standard. Contrast this with the store manager who works independently of supervision, is paid substantially more than his/her staff, is responsible to maintain the store s appearance, hires, 4

5 trains, and schedules employees and exercises significant control over them and their employment conditions, and is evaluated on the performance of these and other managerial tasks, which are this individual s most important duties. A store manager in these latter circumstances may well be deemed exempt. Keep in mind that the occasional exercise of managerial or supervisory duties will not qualify an individual as an exempt executive or administrative employee. Their primary duty must be managerial in nature. An employee whose primary duty is ordinary production work or routine, recurrent, or repetitive tasks will likely not be considered exempt even if the individual has some supervisory responsibilities, such as directing the work of other production-type employees. The structure of the administrative exemption illustrates the required analysis. Beyond the salary basis requirement, there are 2 basic prongs to this test: (1) the duties prong (which requires that the employee s primary duty be the performance of work that is directly related to the management or business operations of the employer or the employer s customers); and (2) the discretion prong (which requires, as the employee s primary duty, the exercise of discretion and judgment regarding matters of significance to the business). Contrast the fact pattern in which the employee exercises significant discretion in formulating management policies or operating practices or performing high level strategic planning, without direct supervision, with the following fact pattern - - in which the employee s work activities are strictly controlled by management, any discretion that is exercised is narrowly confined and does not involve making judgments or being able to commit the employer in significant matters independent of the individual s supervisors, and where the employee has no significant role in developing core business strategy. In short, as to each and every employee who is deemed to be exempt from overtime, the individual s salary, duties, and exercise of discretion must meet the criteria for exemption as set forth in the regulations, and as interpreted by the U.S. and the particular state s DOL and ultimately, by the courts having jurisdiction over the employer s workforce. Where the tests for exemption are not satisfied, the subject employee will deemed non-exempt and entitled to overtime pay. Myth #3: When you are in the Company s workplace doing your job, you are on working time, but when you are chatting or texting on your iphone away from the workplace or the worksite, you are on your own time. FACT: Employers may be held responsible for the fact that an employee is engaged in work activities, even where the employer does not have actual knowledge of the work that is performed. Under the FLSA, the employer will be held liable for work that it knows or has reason to believe is being performed. The employer also is required to keep records of all time that is worked. All time spent in an employee s principal and ancillary duties, whether accomplished on or off the employer s premises, before or after regular work hours, must be counted as compensable working time. Keep in mind that the now-extensive use of Blackberry s, iphones, home computers, cell phones, and pagers in performing basic work duties may further expand the concept of working time to 5

6 situations outside the workplace and outside the typical workday, thereby greatly increasing the employer s exposure in this area. Note: Plaintiff s lawyers frequently highlight the issue of working time issues on their websites to attract potential clients. On being retained by an employee, they carefully scrutinize the employer s pay practices to uncover any practices that fail to compensate employees for all of their working time. Consider, for example, the following fact patterns: Where employee time records (including modifications made by supervisors) are not approved by the employee. Where employees work remotely from home without adequate supervision. Where employees are engaged in work activities using electronic devices outside normal work hours and outside the workplace. Where employees are not properly compensated for business travel according to DOL criteria. Such practices put the employer at risk. Where they are systemic in nature, affecting a number of employees, the stakes are raised further, and the employer s exposure to collective actions and large damage and attorney s fee awards is enhanced. Myth #4: The Company is protected against any FLSA lawsuit, because we had everyone sign a written release of their right to receive overtime pay. FACT: Release or waiver agreements are not enforceable unless approved by the DOL or a court. Further, securing such an unsupervised release or waiver has actually been used as evidence that the employer willfully violated its obligation to pay FLSA-required overtime. Bottom line, all qualifying employees have the right to overtime under FLSA even if they signed a release or a waiver separately or as part of an agreement to receive severance pay, separation pay, or the like. Note further that an employer s mere attempt to require that a release of this nature be provided has been made a criminal offense in some states. Myth #5: Our Company receptionist takes an unpaid meal break each day while covering the front desk. FACT: Generally, meal periods of at least 30 minutes where the employee is completely relieved of all duties and is free to leave the duty post need not be counted as compensable time under the FLSA. In Myth #5 above, however, the employee is not allowed to leave the duty station, and such meal time is compensable working time. Rest periods present somewhat analogous concerns. The FLSA does not require that employees be given rest periods, but if rest periods are provided, generally, they must be counted as time worked under the FLSA if they last 20 minutes or less. However, breaks up to several hours have been found to be compensable working time where the employee could not use that time for his/her benefit. (Applicable state law also should be consulted on this point.) 6

7 It is also poor practice for the employer to dock employees based on the assumption that they are taking meal and rest breaks each and every work day. Employers should track employees actual hours by having them clock in and out for breaks, because it remains the employer s burden to prove the number of hours that the employee actually worked when defending against a claim for unpaid wages or overtime pay. Were employees to claim that they consistently worked through their meal and break periods, an employer that failed to track their time (and have the employee so acknowledge) would not be likely to prevail. Even where employees input their own hours, the employer must maintain (and monitor) that system to hold the employee accountable for keeping accurate meal, break, and time worked records. Employees should be required to acknowledge any corrections to their recorded time records that the employer were to make. Myth #6: Since Company policy requires that all overtime be pre-approved by the employee s supervisor, employees who fail to secure that approval are out of luck. FACT: If company policy provides that overtime must be approved in advance, compliance with that policy, of course, may be required. However, overtime that is actually worked cannot be denied because the employee neglected to secure that approval. The FLSA makes no distinction between approved and unapproved overtime. It is the employer s duty to exercise control to prevent unapproved work from being performed. While employees who violate such a company policy (uniformly enforced, after due notice, etc.) could conceivably be subject to adverse personnel action, the employer who fails to pay for overtime worked in that circumstance has violated the FLSA. Myth #7: Since the Company pays its employees on a bi-weekly basis, an employee s working time can be averaged over that pay period. FACT: For the purpose of calculating overtime, the FLSA considers each workweek on a stand-alone basis, and requires that overtime be paid for any hours worked in excess of 40 hours in that single (recurring) workweek. (There are narrow exceptions for a few designated employee groups, such as hospital employees who meet particular criteria.) Consequently, if a non-exempt employee were to work 80 hours in one workweek and go on vacation the following week, the employer cannot average the two weeks together to attribute 40 hours worked to the second workweek, in order to avoid paying overtime. In this example, the overtime premium of one-half of the employee s regular rate would be due for each of the 40 hours of overtime worked in workweek #1. In short, the FLSA prohibits employers from manipulating the workweek to avoid paying overtime. Myth #8: The product training seminar that our employees voluntarily attended on Friday night was after hours, so there is no need to pay overtime. FACT: The FLSA requires that employers pay for all hours worked. While the FLSA does not mandate premium pay for night or weekend work, overtime must be paid if the non-exempt employee works more than 40 hours in a workweek. Consequently, holding a seminar or meeting after hours by no means suggests that the seminar or meeting was not held on working time. 7

8 It also will be difficult to convince DOL enforcement officials that attendance at a workplace seminar on a job-related subject, which will make the employee more proficient in the individual s job, was voluntary training, as opposed to compensable working time. Note: Employer-required work off the clock has been a frequent source of FLSA lawsuits. DOL s Wage & Hour Division is focused on off-the-clock work. WHD enforcement personnel not only may question employees as to whether they were paid for their attendance at meetings or other activities after hours and on weekends, but also whether they use electronic media such as cell phones, , texting, and laptops in their work duties. Myth #9: Compensatory Time ( comp time ) off can either be awarded: (1) as paid time off in the future; or (2) paid out immediately, instead of paying overtime. FACT: Comp time cannot be awarded or paid out to private sector employees in lieu of pay for the overtime they have earned. (However, this does not prohibit the employer from scheduling time off during the workweek to avoid putting the non-exempt employee into overtime status.) Myth #10: The penalties for FLSA violations are a slap on the wrist. It is important to recognize that the recovery of unpaid overtime represents the bulk of back wages that DOL collects for employees, which underscores the importance of this issue to DOL s enforcement staff. However, the employer s liability does not end there. Penalties under the FLSA for the failure to pay overtime that is due are undeniably severe. Common penalties for FLSA violations include injunctive relief and damages to employees in the form of back overtime pay, prejudgment interest, attorney s fees, court costs, and liquidated damages, such as double back pay, going back up to 3 years for willful violations. The FLSA also expressly permits awards against corporate officers and even supervisors who willfully violate this law. Willful violators may be prosecuted and fined up to $10,000 per violation, and can be sent to prison after a second conviction. Maryland Myth: The State of Maryland provides the same penalties for overtime violations as does the FLSA. FACT: Overtime is required to be paid to qualifying employees under the FLSA and Maryland law. Maryland recently amended its Wage Payment and Collection Law, so that the definition of wages now includes overtime pay. As a result of this amendment (which became effective on October 1, 2010), the penalty for the failure to pay overtime has substantially increased in Maryland. Consequently, a Maryland employer may be liable for 3 times the amount of the overtime owed (as opposed to 2 times under federal law), as a statutory penalty for violating Maryland law, plus the employee s attorneys fees. Additionally, as a further penalty under Maryland law, an employee can claim up to 3 years of back overtime liability (federal law provides up to 2 years for a non-willful violation and 3 years for a willful violation). Consequently, a Maryland employer who, prior to October 1, 2010, was subject to paying up to 2 (or possibly 3) years of back overtime doubled, may now be subject to paying up to 3 years of back overtime tripled. 8

9 *Potential Damages Calculator in a Hypothetical Misclassification Lawsuit* (This example was taken from the Bureau of National Affairs Workplace Law Report (10/1/10)) Presume that a class of 100 employees sues the employer and the court determines that overtime pay is owed for 2 years, due to the employer s misclassification of the positions at issue. The subject employees would be entitled to 1-1/2 x their regular rate of pay for every hour worked over 40 in a workweek. Presume that the annual salary of the employee is $74,840/yr., which, based on a 40 hour week, amounts to just under $36./hr. 1-1/2 x $36. = $54./hr. (the overtime pay rate). Presume that the employee worked no more than 10 hours of overtime each week, which amounts to some 520 unpaid hours over 2 years. 520 x $54. = $28,080 in unpaid overtime. Double the $28,080 = $56,160 (representing double [liquidated] damages). $56,160 x 100 = $5,616,000 (representing the 100 member class)--plus plaintiff s attorneys fees, costs, interest, your own counsel fees, and costs, etc. Note: This hypothetical could be considered a conservative calculation in future Maryland litigation, because 3 years of back overtime tripled can now be awarded in Maryland where the employer s failure to pay overtime is deemed to be willful. Note further: Some courts have applied a more employer-friendly overtime calculation formula in white collar misclassification cases under the FLSA, in circumstances where the parties clearly intended and agreed that a fixed salary would compensate the employee for all hours worked in any workweek, not just for the first 40 hours. That fluctuating workweek pay plan for overtime calculation (in which overtime is calculated by dividing the salary by the hours worked and paying one-half that amount for overtime hours of work) is further premised on the employer s compliance with a DOL regulation that addresses this arrangement. It should be recognized, however, that some courts have refused to apply the fluctuating workweek method of overtime calculation in misclassification circumstances. 9

10 Going Forward The Obama Administration is committed to an expansive reading of the FLSA. In oral argument before the Supreme Court on October 13, 2010, in Kasten v. Saint-Gobain Performance Plastics Corp., the Administration urged the Court to broadly interpret the FLSA to hold that an employee who complains orally to his employer about alleged wage/hour violations is protected from retaliation by the employer. The Administration seeks to reverse a federal appeals court ruling that only written complaints to government officials are protected against retaliation under the FLSA. In addition to DOL s Misclassification Initiative, described above, the WHD has implemented a We Can Help campaign to educate low-wage workers about how to enforce their rights under the FLSA, which encourages still more litigation. Further, all employers having any employees covered by the FLSA already are required to post the Wage and & Hour Division s poster, which publicizes the overtime standard, and informs employees how to file complaints against the employer. In April 2010, DOL also announced a Plan/Prevent/Protect Initiative that is designed to require employers to create comprehensive Compliance Action Plans to identify and correct employment law violations at their workplaces. This would, in effect, expand DOL s prophalytic safety and health programs mandatory compliance concept to FLSA compliance activities. Among the various Plan/Prevent/Protect initiatives, DOL plans to require employers to disclose to and advise exempt employees of the basis and rationale for their exempt status. In a Fact Sheet posting on DOL s website, DOL states that employers who seek to exclude workers for the FLSA s coverage will be required to perform a classification analysis, disclose that analysis to the worker, and retain that analysis to give to [WHD] enforcement personnel who might request it. DOL reportedly is considering the issuance of a proposed rule to this end. Another aspect of DOL s Misclassification Initiative, announced by Deputy Labor Secretary Seth Harris, is DOL s position that a company which classifies it workers as independent contractors (as opposed to employees ) should be required to prepare a written explanation and rationale for its decision-making, and provide the contractors with that explanation. DOL has announced its intention to issue another proposed rule to require these compliance activities, the retention of the employer s contractor status analysis, and the employer s obligation to provide that to DOL enforcement personnel on request. In creating Compliance Action Plans, DOL expects business to task designated individuals with the responsibility for putting appropriate processes in place and achieving compliance with DOL s enhanced expectations. In short, employers should act decisively now to support their decision-making in this area. This includes conducting a careful review of all employee classification decisions and wage payment procedures to make certain that employees who are not being paid overtime satisfy the legal requirements for exemption, that overtime, properly calculated, is being paid to all eligible employees, that working time is adequately controlled, properly tracked and calculated, and restricted, if necessary, and that employees have not been misclassified as independent contractors. The focal point of such analyses should be an assessment of the actual work that is 10

11 performed by the employee at issue. Employers should be able to document their decisionmaking. Steps to be taken by the employer may also include self-directed remedial action, where necessary, such as reclassifying employees who have been improperly classified, and restructuring their duties and compensation. Where appropriate, retroactive overtime pay may be awarded. While such measures could conceivably raise employee awareness as to the issue of misclassification, the failure to correct misclassifications maintains the potential for far greater legal exposure and penalties under the FLSA and state law, in the event that the employer s decision-making were to be challenged in the future by DOL or by employees individually or collectively. Bottom Line In the final analysis, the best practice is to identify and address any potential overtime issues head on NOW -- before a complaint or lawsuit has been filed and before DOL shows up to audit your company, with the advice and guidance of counsel.* * The foregoing brief summary has been prepared for the general information of the Chamber, clients, and friends of the Firm. It does not comprehensively address all pertinent legalities, rules, exemptions, or exceptions concerning overtime law or regulations implementing the FLSA or Maryland law, or case law or other developments as to DOL s (or Maryland s) enforcement of applicable laws in this area. Further, while this analysis is designed to provide accurate and authoritative information with regard to the subject matter covered, it is provided with the understanding that it does not constitute the rendering of legal or other professional services as to any specific matter. If you have any questions or require assistance in this area, contact counsel. 11