Legal Trends: Wage and Hour Claims

Legal Trends

Build your good-faith defense to wage and hour claims to reduce liability in two ways.

The latest statistics confirm that Fair Labor Standards Act (FLSA) claims by groups of employees are rising at an alarming rate and quickly outpacing other types of employment class actions. In fact, the number of FLSA collective actions for wage and hour law violations now exceeds all other types of employment class actions combined.

Understandably, well-publicized multimillion dollar settlements and plaintiffs’ verdicts have stimulated tremendous interest in this type of litigation within the plaintiffs’ bar. The widespread media attention these cases have garnered, combined with the ready availability of FLSA information on the Internet, means that employers should assume that their pay practices are subject to challenge under the 1938 law—and should take proactive measures to minimize potential risk.

Many HR executives and in-house attorneys recognize that a periodic review of payroll practices and compliance with FLSA requirements makes both good business and common sense. Indeed, a relatively simple review of payroll policies and procedures can reveal most potential violations, as well as an employer’s vulnerability to FLSA collective action.

But there is another, equally important reason to conduct such a review: An employer’s compliance efforts—or lack thereof—can directly impact its potential liability for both an expanded statute of limitations and the availability of liquidated (double) damages. Both types of expanded liability—which can significantly boost an employer’s legal costs—can be leveled at employers that commit willful violations of the FLSA.

Employers that can show they have made a sincere effort to comply with the law—in short, that they acted in good faith—will have an easier time proving that any violations they committed were not willful.

Employers can establish their good faith by building a solid foundation of well-drafted, consistently enforced policies, and by relying on expert advice and counsel regarding compliance issues as well as orientation and training of employers and managers on their FLSA obligations.

This article will explain how an employer’s good faith affects the statute of limitations and the availability of liquidated damages, and will elaborate on the building blocks essential to an employer’s ability to defend its actions in an FLSA lawsuit.

The Cost of Willfulness

In 1947, with the passage of the Portal-to-Portal Act, Congress amended the FLSA to include a uniform federal statute of limitations, giving plaintiffs two years to file claims for unpaid wages, overtime or liquidated damages. If a plaintiff can prove that an employer willfully violated the FLSA, however, the statute of limitations—in other words, the maximum period of liability—expands to three years. ›

The financial implications of a willful violation finding can be staggering. The addition of a third year of liability not only opens the door for plaintiffs whose claims would otherwise have been void under the two-year limitations period, but it also increases the potential financial exposure for back pay up to an additional year—adding up to an extra 50 percent in costs.

Moreover, a number of courts now hold that employers who commit willful violations are automatically liable for double damages—on top of the additional liability for back pay. Taken together, this means an employer’s potential costs for damages could soar threefold.

Consider the following collective action example, in which the employer’s back wage liability totals $1 million per year. That would come to $2 million under the two-year statute of limitations. But if the employer is found to have acted willfully, its liability expands from two years to three years, adding an extra $1 million for a total of $3 million.

Further, if the court also rules that the employer is liable for double damages, the cost of the damage award will soar to $6 million—three times what it otherwise would have been.

This example, modeled after an actual case, provides a sobering economic incentive for employers to avoid even the appearance of willful violations.

Fighting Willful Violations

To establish that an FLSA violation is “willful” for statute of limitations purposes, a plaintiff must plead, and prove to the satisfaction of a jury, that the employer either knew its payroll practices violated the FLSA or showed reckless disregard for whether its practices complied with the FLSA. McLaughlin v. Richland Shoe Co., 486 U.S. 128 (1988).

A plaintiff easily can show a willful violation if the employer knew its practices violated the FLSA as a result of a prior U.S. Department of Labor (DOL) investigation or if the employer was otherwise aware of and ignored FLSA requirements.

For example, in one case, an employer was found to have willfully violated the FLSA by continuing to miscalculate overtime after the DOL advised the employer that its practice was unlawful. Similarly, in another case, a court allowed a three-year limitations period because the employer’s outside counsel had advised the employer that its manager trainees were nonexempt, but the employer failed to reclassify the position.

In contrast, plaintiffs have failed to establish willful violations where employers diligently attempted to educate themselves about FLSA requirements by attending seminars, reviewing DOL publications, or consulting with an attorney or with DOL officials.

Case histories also show that employers who do not make a reasonable and honest effort to understand and comply with the FLSA can be found to have acted recklessly, which also supports a finding of willfulness.

For example, in Singer v. City of Waco, 324 F.3d 813 (5th Cir. 2003), the court affirmed that an employer willfully violated the FLSA. Key evidence: A city manager admitted that employees were not being paid correctly. Also, the city’s former HR director recommended a payroll practice review, but city officials responded: “We don’t even want to open that can of worms.”

The moral of that cautionary tale: Employers who turn a blind eye to potential FLSA violations—whether knowingly or recklessly—and who fail to investigate, run the risk that their omissions may help prove that they willfully violated the FLSA.

Good-Faith Defenses

In the Portal-to-Portal Act, Congress created two employer defenses against allegations that an employer willfully violated the FLSA. These defenses are commonly referred to as the “good-faith defenses.”

Section 10 good-faith defense. Section 10 of the Portal-to-Portal Act provides an absolute defense to FLSA minimum wage and overtime claims. This defense is available only when an employer proves it took or failed to take a particular action because, in good faith, it applied a written administrative regulation, ruling, approval or interpretation of the DOL’s Wage and Hour Administrator or any administrative practice or enforcement policy of the administrator. 29 U.S.C. § 259.

The purpose of section 10 is to protect completely employers who rely in good faith on the Wage and Hour Administrator’s mistaken or invalid interpretation of the FLSA. Successful section 10 defenses are exceedingly rare, according to the DOL’s “Field Operations Handbook.” Consequently, this article will focus on the second good-faith defense under section 11.

Section 11 good-faith defense. The section 11 good-faith defense allows a judge to reduce or eliminate an award of liquidated damages if the employer shows that its actions were taken in good faith and that the employer had “reasonable grounds for believing” its actions did not violate the FLSA. 29 U.S.C. § 260.

Note that if a jury finds an employer guilty of a willful violation during the liability phase of a trial, by logical implication the employer will be unable to establish its good faith during the remedies phase of the trial. But if willfulness was not established earlier for statute of limitations purposes, an employer still has an opportunity to avoid liquidated damages at the judge’s discretion.

Unlike section 10, the section 11 good-faith defense is not a complete bar to liability and is far more subjective.

Under section 11, an employer must prove both that its actions were taken in good faith and that the employer had an objectively reasonable basis for believing that its actions did not violate the FLSA. Good faith alone will not prevent a court from imposing liquidated damages. In fact, a number of courts have warned that unless an employer can establish both elements of the defense, liquidated damages awards will be the norm, and single damages the exception.

Specifically, a number of courts have found that an employer’s failure to investigate its FLSA obligations can establish a willful violation and prevent an employer from establishing that there was a good-faith basis for its actions. For example:

• An employer could not rely on the good-faith defense where HR failed to consult with the in-house legal department.
• A plaintiff was awarded liquidated damages when the employer failed to introduce evidence that it had taken steps to evaluate its FLSA compliance or that it had sought expert advice regarding its classification of the plaintiff as an independent contractor.
• An employer failed to establish a good-faith defense where the employer had not considered one of the required elements of an overtime exemption, suggesting that the employer’s review of the position’s description and the regulations was seriously lacking.

An employer that fails to take steps to determine its FLSA obligations or to ensure its continued compliance with the law may unwittingly undermine the company’s ability to defend itself against the double whammy: both the extended three-year statute of limitations and an award of liquidated damages.

Similarly, an employer cannot insulate itself from double damages with the claim that it was well-intentioned but ignorant of FLSA requirements. As noted by Judge Easterbrooks in Walton v. United Consumer’s Club, 786 F.2d 303, 312 (7th Cir. 1980): “[A] good heart but an empty head” does not satisfy an employer’s burden to establish it has acted in good faith for purposes of this defense.

Reported decisions suggest that employers can rely on a number of factors to establish a section 11 good-faith defense. For example, several courts have found that where an employer consults with a DOL investigator or attorney but receives incorrect advice, the employer can establish that it acted in good faith.

Similarly, where an employer stays abreast of current developments by attending seminars on FLSA compliance, studying the relevant statutes and regulations, contacting the DOL for compliance assistance, and periodically reviewing its payroll practices, courts generally have found that these employers have acted in good faith even when they were mistaken about the lawfulness of their practices.

Now let’s lay out the building blocks one by one, so you can build your good-faith defense on a firm foundation.

Building Block No. 1:
Payroll Reporting And Safe Harbor Policies

Unfortunately, many employers do not have a well-publicized payroll policy advising exempt and nonexempt employees about the employer’s payroll rules and procedures.

Nonexempt employees should receive a carefully drafted policy that clearly defines working time and prohibits off-the-clock work. (For a detailed discussion of this subject, see "Developing a 'Clock-Work' State of Mind" in the July–August 2004 issue of the Society for Human Resource Management’s Legal Report.)

Equally important, in light of the recently revised FLSA white-collar regulations, employers should implement a safe harbor policy prohibiting improper salary deductions from exempt employees’ pay, providing a procedure for exempt employees to report any improper deductions and ensuring that these employees are paid the required minimum salary under the new regulations. See 29 C.F.R. § 541.603. (For a detailed discussion of the salary basis test, including improper deductions, see "Step by Step" in the February 2005 issue of HR Magazine.)

Building Block No. 2:
Implement A Reporting Mechanism

Implement a reporting mechanism that employees can use to report violations of your payroll policies and procedures. Frequently in FLSA cases, plaintiffs claim they reported alleged violations but managers failed to take action. In other instances, employees claim they were too intimidated to report alleged misconduct.

A centralized reporting or complaint procedure with a toll-free number provides a reliable route for employees to report misconduct and typically overcomes a plaintiff’s claim that there was no way to report problems. The toll-free reporting procedure can be modeled on the procedure your employees use to report harassment or retaliation.

Building Block No. 3:
Training and Orientation

Well-trained employees and managers are less likely to violate the FLSA inadvertently. Despite recent advances in the availability, quality and affordability of employee and management training, comparatively few employers train managers and nonexempt employees on common FLSA issues such as proper timekeeping practices and the dangers of off-the-clock work.

A number of court decisions suggest that many managers are unaware they have a duty to ensure that their employees accurately report their hours worked. Regrettably, many of these cases might have been avoided had these employers dedicated internal resources to training on these subjects.

Even more fundamental than formal training on FLSA issues is a basic orientation for managers and employees on their time reporting obligations. Some employers fail to provide even this much: basic instructions to employees on how to report their time and instructions to managers on how to ensure that employees accurately report their time. Don’t make that potentially costly mistake.

Building Block No. 4:
Audit Exempt Jobs

Review exempt job classifications to determine whether these positions are properly classified under the FLSA. The case law is clear: If an employer classifies a position as exempt from overtime, the employer is required to have conducted a reasonable investigation to ensure that the employer has a good-faith, reasonable basis, supported by case law or DOL opinion letters, to justify the exempt classification. Fortunately, the 2004 implementation of the new white-collar regulations has spurred many employers to do precisely this.

Equally important, for an exemption review to withstand a challenge, the employer should do more than simply review the job description. Many job descriptions are aspirational and do not reflect employees’ actual duties. To establish a solid good-faith, reasonable basis for an exemption decision, an employer should gather complete and accurate data about the employer’s responsibilities. Often, the most effective way to do so is to gather information about the job duties from both the employee’s supervisor and the employee.

Building Block No. 5:
Audit Nonexempt Pay Practices

A thorough review of an employer’s nonexempt actual pay practices can readily detect most of the common pay practices that violate the FLSA. The review should focus on recordkeeping, payroll reporting procedures, overtime calculations, automated time clock rules, and meal period and break practices.

Building Block No. 6:
Ask Experts

Consult with the DOL or other wage and hour experts to ensure that pay practices comply with FLSA requirements. Many of the law’s requirements are archaic and counterintuitive. In many reported cases, employers have avoided willful violations and liquidated damages awards by establishing that the employer consulted with an expert.

Recognized experts include the DOL’s Wage and Hour Division staff, compensation-related consulting groups, and both in-house and outside employment counsel.

A variety of free resources are available through the DOL’s Office of Compliance Assistance Programs and its web site. The web site allows employers to subscribe to e-mail updates, use the FirstStep Employment Law Advisor tool or even send e-mail inquiries to the DOL.

There are also numerous articles on wage and hour topics on the Society for Human Resource Management’s web site at www.shrm.org.

Building Block No. 7:
Stay Informed

Keep up with current developments. Case history suggests that employers have an ongoing responsibility to monitor case law developments and other changes in the law. Employers can stay informed through a variety of sources: the Internet, periodicals, trade publications, outside legal counsel, the DOL or seminars.

Editor’s note: This article should not be construed as legal advice or as applicable to specific factual situations.

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Lisa A. Schreter recently joined the Atlanta office of Littler Mendelson PC as a shareholder. She is an accomplished employment litigator and a recognized authority on the Fair Labor Standards Act. Before becoming an attorney, she was a human resource executive with extensive experience in wage and hour compliance matters.

Web Extras

• Office of Compliance Assistance Programs (Source: U.S. Department of Labor)
• FirstStep Employment Law Advisor (Source: U.S. Department of Labor)
• Overtime Policy (SHRM Sample Policies)
• Developing a 'Clock-Work' State of Mind (SHRM Legal Report)
• HR Magazine: Step by Step (February 2005)
• HR Magazine: Legal Trends home page (February 2005)