Complex Labor Law Regulations Raise the Stakes for Organizations

White Paper Complex Labor Law Regulations Raise the Stakes for Organizations Cases on the rise; focus on risk management; strategic action required

Wage and Hour Compliance is Growing in Complexity Investigations, litigation, and wage recovery focused on wage and hour violations are at an all-time high and showing no signs of decreasing. Since the beginning of 2009, the Department of Labor (DOL) Wage and Hour Division has aided 1.5 million workers, with $1.3 billion in back wages recovered. 1 The introduction of the Affordable Care Act (ACA), along with the proposed changes to overtime regulations, have added new layers of complexity to managing labor compliance. Now more than ever, it s imperative that organizations take comprehensive, proactive steps to develop compliance strategies and tools to protect themselves from challenges that can occur at the federal, state, and local levels. Seeking Violations The DOL found wage violations in 78% of agencyinitiated investigations in fiscal year 2014, up from 65% in fiscal year 2009. 6 Fair Labor Standards Act (FLSA) cases are expected to rise for many reasons. Federal standards for class certification have tightened, increasing the potential for denial or decertification, in turn driving up the filing of single- and multiplaintiff lawsuits. Movements across the country to raise the minimum wage have led to an increased focus on wage and hour laws. And proposed new regulations that would extend overtime protections to millions of previously exempt white collar workers have increased employee awareness of wage and hour policies and practices. With this added complexity and increased focus on enforcement, employers need to protect themselves from potentially significant penalties for noncompliance with wage and hour regulations. Recent developments illustrate just how important it is to be prepared should a wage and hour challenge be brought against your organization. The DOL has proposed changes to overtime regulations that would extend overtime protections to nearly five million white collar workers in the first year of implementation 2 In fiscal year 2014, more than 43 percent of the Wage and Hour Division s investigations were agency-initiated, up from 35 percent just five years ago 3 In 2014, the top 10 wage and hour class-action settlements totaled $215 million 4 In fiscal year 2014, the Wage and Hour Division found more than $240 million in back wages for more than 270,000 workers whose employers improperly denied them pay they had earned 5 1 DOL News Brief, A Quarter Billion Dollars in Back Wages (December 2013), found at http://www.dol.gov/_sec/ newsletter/2013/20131212.pdf. 2 The White House, FACT SHEET: Middle Class Economics Rewarding Hard Work by Restoring Overtime Pay (June 30, 2015), found at https://www.whitehouse.gov/the-press-office/2015/06/30/fact-sheet-middle-class-economicsrewarding-hard-work-restoring-overtime. 3 DOL. 4 Alex Passantino and Lawrence Lorber, Keeping the Pressure on Employers, Administration Requests $41 Million Budget Increase for Wage & Hour Division, Wage & Hour Litigation Blog (March 5, 2014), found at http://www. wagehourlitigation.com/dol-compliancerule-making/keeping-the-pressure-on-employers/. 5 DOL. 6 DOL. 2

Is your organization handling the following wage and hour conditions correctly? Or could yours be one of the multitudes of employers that are out of compliance with wage and hour regulations? Wage and hour compliance starts with being able to answer the following questions: Are independent contractors classified correctly? Should these workers be classified as employees? Do you have accurate, up-to-date employee data, including historical data? Are your exempt and nonexempt employees classified correctly? Could your nonexempt salaried employees be eligible for overtime? When do donning and doffing duties, computer boot-up and logoff time, security screenings, and other similar activities become compensable time? How are you handling unapproved overtime practices? Are you paying earned overtime correctly? Are you tracking meal and rest breaks in accordance with regulations? When is work performed off the clock, such as remote network access and checking email at 3 a.m. from a smartphone, compensable? According to attorney Paul DeCamp, former administrator of the U.S. Department of Labor s Wage and Hour Division and now a shareholder in the Washington, D.C., region office of Jackson Lewis P.C. and national chair of the firm s Wage and Hour Practice Group, these are just some of the issues that can lead companies into trouble with wage and hour compliance. Depending on the exact employment circumstances, the industry in which you re operating, and unique state and local laws, your organization could be liable for wage and hour violations in each of these situations. Investment in wage and hour compliance should really be seen as part of risk management for the business. It s an investment that always pays dividends. Paul DeCamp, shareholder, Jackson Lewis P.C., and former administrator, Wage and Hour Division, DOL Double Trouble Since 2004, federal FLSA cases have more than doubled 2004 3,426 CASES 7 2014 8,066 CASES 8 7 Seyfarth Shaw LLP, FLSA Cases in Federal Court (2013), http://www.wagehourlitigation.com/files/2013/07/flsa- Cases-Filed-2013.pdf. 8 Seyfarth Shaw LLP, 11 th Annual Workplace Class Action Litigation Report: 2015 Edition, at 6. 3

DOL Maintains Strong Enforcement Commitment Secretary of Labor Thomas E. Perez is clearly committed to enforcing wage and hour compliance regulations to protect the rights of workers in what he refers to as a dramatically changed 21 st -century workplace. 9 Noting that President Obama requested the hiring of more Wage and Hour Division investigators to support this effort, Perez stated that the DOL is investigating strategically with the resources we already have by leveraging our understanding of industries and business models to increase compliance, and assessing liquidated damages and civil money penalties when we find violations so that employers know we mean business. 10 Perez s commitment is clearly supported through President Obama s recent announcement to extend overtime protections to millions of white collar workers, which is expected to cause an increase in the number of FLSA lawsuits. While there is no definitive connection between such an extension and the rise in FLSA lawsuits when similar initiatives were last revised in 2003 and 2004, it should not be ignored as a potential cause of another spike in cases when the DOL revises the rules again in 2015. 11 At the heart of the wage and hour debate is the fundamental impact unregulated policies can have on the lives of those in America s workforce and on the economy overall. As Perez notes in his DOL blog, Enforcement matters. It is essential to creating shared prosperity and building a strong economy that works for everyone. It is a high priority for us at the Labor Department because it is essential to advancing economic justice, addressing income inequality, and ensuring that hard work is rewarded with a fair wage. 12 As employers and employees increasingly become pulled into the minimum wage and overtime eligibility debate, the trend of individual, class, or collective wage and hour claims is not likely to slow. This anticipated trend may be further compounded by the Affordable Care Act. We ve found that wage and hour compliance is one of the most difficult and persistent problems for employers, says DeCamp. And it s going to become more challenging with the Affordable Care Act now rolled out. Now is the time for employers to conduct workplace law compliance reviews, including checks of their wage and hour policies and practices, before a government compliance officer arrives on the premises. We ve found that wage and hour compliance is one of the most difficult and persistent problems for employers. And it s going to become more challenging with the Affordable Care Act now rolled out. Paul DeCamp, Jackson Lewis P.C. 9 Tom Perez, Enforcement Matters: Wage Violations, Workers and the Economy, U.S. Department of Labor (December 4, 2014), found at https://blog.dol.gov/2014/12/04/enforcement-matters-wage-violations-workers-and-the-economy. 10 Tom Perez. 11 Seyfarth Shaw LLP, 11 th Annual Workplace Class Action Litigation Report: 2015 Edition, at 8. 12 Tom Perez. 4

Cases Continue to Rise Attorneys know that wage and hour cases are often easier to prove than traditional employment discrimination cases. Wage and hour cases tend to be about how people are paid for what they do at their jobs, and those are pretty objective facts, says DeCamp. Unlike in a discrimination case, you generally don t have to prove what someone s intentions were or what they were thinking. Wage and hour cases can also be very lucrative. Most employers do not want to take these cases to court, because the potential exposure is very high. If employees can get a class certified, there is a high likelihood that there will be a settlement, and then you have attorneys fees, liquidated damages, and other kinds of enhanced remedies. The increase in wage and hour cases has raised the issue s profile among plaintiff s attorneys, employees, and the media. In some areas, attorneys are actively seeking wage and hour cases in organizations and industries that are likely to have violations, reaching out to potentially affected employees through advertising and even billboards. The plaintiffs bar is very organized, says DeCamp. They meet and plot out the latest theories of liability and are always looking for practices in industries that are noncompliant or arguably noncompliant and that lend themselves to class litigation. They understand that if one employer in an industry has a problem, there may be others with the same problem and so there will be copycat suits filed in rapid succession. The ACA Adds Complexity When it comes to evaluating how the ACA will impact wage and hour compliance, DeCamp puts it bluntly: Thirty is the new forty. He says that since the requirement to provide affordable health coverage to all employees working an average of 30 hours or more per week went into effect on January 1, 2015, there is now an increased focus on this new hourly threshold. Companies will have to keep a focus on the 40-hour threshold for the purposes of overtime, but now there will be a lot more scrutiny around 30 hours. DeCamp notes that the DOL is preparing to roll out significant enforcement tools in the coming year, looking closely at workers who are at or near 30 hours, to figure out whether an employee or manager is engaging in time-shaving. The DOL will also be focused on whether employees are being misclassified as independent contractors to avoid having them count as workers who would be subject to the ACA, he says. Thirty is the new forty. Paul DeCamp, Jackson Lewis P.C. 5

DeCamp continues, Companies need to be aware of whether they have workers classified correctly, as well as whether they re counting and compensating all hours worked. Just as they have to make sure employees are getting credit for all time worked above 40 hours, they must also know whether someone is working more than 30 hours. Avoiding Overtime Risk Tracking employee wages and overtime isn t always clear cut. With compliance on the line and FLSA enforcement growing tighter, an error can be quite costly, even if it s unintentional. It s probably not realistic for your organization to eliminate overtime altogether, and in fact, effective use of overtime can be a valuable productivity and morale tool. For employers, overtime is more than just an issue of compensation management must ensure consistent and fair scheduling to avoid employee satisfaction and engagement problems. Effective employee relations strategies can alleviate much of the confusion that typically surrounds overtime. By ensuring that employees are scheduled consistently and fairly, including an equitable distribution of overtime, organizations can strategically control overtime costs and compliance. Managing FLSA compliance requires companies to establish clear policies that communicate expectations around overtime to employees. Managers must be able to plan, forecast, budget, and schedule effectively. With visibility into pending overtime, as well as planned and unplanned absences, managers can make decisions that support the bottom line and compliance. What s the Damage? If your organization is found to be noncompliant with wage and hour regulations, the penalties, both monetary and nonmonetary, can be significant. Monetary penalties include compensatory damages of up to two years back pay, with three years back pay often sought for willful violations. The awarding of liquidated damages can double back-pay damages. And defending wage and hour claims can be very costly, according to DeCamp. Depending on the scope of the claim and the risk of liability, these cases very quickly get into the hundreds of thousands of dollars in defense costs, and that s before you ever get near a courtroom, DeCamp explains. There tends to be a lot of discovery and a lot of fighting over whether the case is proper for class certification, because the number of plaintiffs drives the exposure. If the exposure for one person is in the hundreds or low thousands of dollars, that s a manageable settlement. But when you multiply that amount by hundreds or thousands of employees, it becomes a different dynamic and you can quickly get into the tens of millions of dollars. Most Common Overtime Violations Susan Desmond, Shareholder, Jackson Lewis P.C. Assuming that all employees paid a salary are not due overtime Limiting the number of hours employees are allowed to record Failing to include all pay required to be included in calculating the regular rate for overtime Failing to add all hours worked in separate establishments for the same employer when calculating overtime due Making improper deductions from wages that cut into the required minimum wage or overtime Failure to pay overtime on non-discretionary bonuses Failure to pay for tasks done before or after work 6

DeCamp refers to defending a wage and hour case as a real distraction for an organization. Executives and other high-level personnel must spend hours tied up in depositions, and the discovery process can be very time-consuming and taxing. Relationships with employees and customers can also be negatively affected. Says DeCamp, What you worry about is the us against them mentality that can start to take over, especially in a class-action litigation. You have a situation where employees are soliciting other workers, saying, The company has been cheating us. Obviously this is very destructive to employee morale. Accompanying media stories can also damage an organization s reputation among customers and prospective employees, who may not want to deal with an organization that is perceived as having violated its employees rights. Who s at Risk? Unfortunately, there isn t one typical profile that identifies organizations at risk of wage and hour violations. Weaknesses can be found in organizations large, medium, and small, startup and mature, across every industry. And too often organizations don t even realize that what they re doing is noncompliant. DeCamp describes some common scenarios: Small or new companies often lack the internal HR and legal resources to establish compliant wage and hour policies. Typically, all of the company s energies are directed toward keeping the business up and running, and little or no thought has been directed toward creating and implementing compliance policies. In mature industries, HR practices tend to converge whether or not they are compliant. For example, if a certain kind of worker is treated as an independent contractor at organization A, competitive pressures will likely lead organization B to do the same. A successful legal challenge to one organization in a mature industry can open Companies are often shocked the floodgates of litigation within that industry. to learn that they can be on the Organizations may have established compliant policies at the hook for many millions of dollars corporate level, but if enforcement, training, or understanding is lacking, these policies may not be followed properly at the local for unintentional errors. level. According to DeCamp, There are ambiguities in the law itself, and sometimes the court disagrees with how a company has established its policies. Paul DeCamp, Jackson Lewis P.C. 7

Why Is It So Hard to Be Compliant? The laws governing wage and hour issues are complex, vary from one jurisdiction to the next, and change over time. Ignorance of the law is no excuse; organizations must be compliant with all applicable federal, state, and local wage and hour regulations. For organizations with operations in multiple states, compliance is a complicated and ongoing process. For example, the California meal and rest break laws contain strict guidelines and levies that are unique to the state. And while federal statutes require organizations to maintain wage and hour records for three years, the state of New York requires six years. Finally, companies need to automate, to the extent possible, all policies for timekeeping, scheduling, tracking overtime, and other employee time and pay information. Compliance is further complicated when companies use manual or semimanual systems for employee time and pay policies, such as tracking and totaling hours worked and calculating pay and overtime. When operating with outdated systems such as these, it is nearly impossible to pay employees correctly 100 percent of the time, creating errors that leave an organization open to wage and hour claims. Paul DeCamp, Jackson Lewis P.C. Manual systems may also complicate or not even include record-keeping, a critical component in your defense against wage and hour claims. If challenged, among the elements of compensation you ll have to provide are timesheets, records that show how many hours worked, overtime hours, what pay employees received, whether it was straight pay or overtime, wage basis, deductions, and more, says DeCamp. This documentation is not something you want to be thinking about for the first time when the DOL or a lawyer comes calling. Getting policies right, every time One of the worst mistakes an organization can make regarding wage and hour compliance is thinking that once it has established wage and hour policies, it doesn t need to think about them again. In fact, these policies won t support compliance unless they are interpreted, applied, and enforced accurately and consistently across your organization, in every department, division, and location. It s important to help managers understand how to apply the laws, and to prevent them from going rogue to play favorites, increase their own compensation, or treat some employees unfairly. 8

What Can You Do? Four Steps to Follow 1. Create a culture of compliance: According to DeCamp, the first step that an organization needs to take is to be aware of wage and hour laws and to adopt a culture of compliance. You need to comply with these laws they re serious. Many companies tend to think that as long as they ve acted ethically and treated people fairly, they ve done enough. But this doesn t work, and it can lead you in the wrong direction. Companies are often shocked to learn that they can be on the hook for many millions of dollars for unintentional errors. 2. Know what you need to know: Next, take the time to find out what s really going on in your organization, both at headquarters and in the field. DeCamp says, There may be great policies that have been crafted by lawyers and then put on the shelf and forgotten, and then you find out that in your dozens, hundreds, or thousands of locations, people are carrying out policies that in no way resemble what you think your compliance policies are. You need to know what you need to know. Examine your policies and applicable laws, and review annually. 3. Train, train, train: Third, train people, over and over and over again. With annual turnover in many workplaces exceeding 100 percent, it s critically important that both employees and managers are up to speed with policies. And don t train people only when they re hired; train them throughout their employment so they come to see compliance as part of their job performance. 4. Automate: Finally, companies need to automate, to the extent possible, all policies for timekeeping, scheduling, tracking overtime, and other employee time and pay information, says DeCamp. You need to have this information built into an automated system that will track it for you, because that really reduces the possibility of human error. The alternative is having information managed by hand or entered into a computer by hand, and that is just prone to error. Having automated systems in place to manage wage and hour issues really enhances compliance significantly. This leads to reduced exposure, reduced risk of violations, and overall cost savings. Business Challenges Data is inaccurate and out of date Too many manual processes Systems are out of date Limited resources Managers lack accountability Labor laws are complex and fluid Take Control Be prepared with reliable data More easily cope with complex labor laws Get the data you need, when you need it Make your managers more effective Operate more efficiently 9