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How HR Can Prevent Wage Theft

A disturbing increase in wage theft cases is cause for reflection—and action—among employers.


May CoverIn late April 2014, California construction company Ghilotti Brothers Inc. agreed to pay $1.35 million to settle workers’ claims that it shortchanged them. The alleged violations included several maneuvers designed to avoid paying employees for their work, including denial of meal breaks and rest periods and an outright failure to pay for hours worked. 

Disputes over wages also resulted in seven class-action lawsuits being filed in March 2014 by McDonald’s workers in New York, California and Michigan. 

Violations involving pay—both intentional and unintentional—are increasingly being characterized as “wage theft.”

Wage theft cases typically allege the underpayment or nonpayment of employee wages in violation of the federal Fair Labor Standards Act (FLSA) and state wage and hour laws. FLSA claims have increased by more than 600 percent over the past 25 years, and wage-theft prevention laws have recently become a hot topic in state and city governments around the United States.

The term “wage theft” is proving to be an effective attention-grabber: It sparks swifter, more diligent responses from business leaders than do the terms “potential wage and hour violations” or “FLSA compliance.”

Notes Ken Pinnock, SPHR, GPHR, associate director of human resources at the University of Denver: “When you say ‘wage theft,’ the feedback from managers often is something like, ‘Wait a minute. I didn’t steal!’ ”

Pinnock, a member of the Society for Human Resource Management’s (SHRM) Ethics/Corporate Social Responsibility and Sustainability Special Expertise Panel, suggests that HR professionals should leverage the current focus on wage theft to promote compliance with the FLSA and a fast-growing assortment of state wage-theft prevention laws.

The Scope of the Problem

“Millions of workers are having billions of dollars of wages stolen each and every year,” writes Kim Bobo, executive director and founder of Chicago-based Interfaith Worker Justice (IWJ), in her book Wage Theft in America: Why Millions of Working Americans Are Not Getting Paid—and What We Can Do About It (The New Press, 2011). “It is a major crisis cutting across industries, regions and many sizes of firms.”

The IWJ is a network of people of faith advocating for improved wages, benefits and conditions for workers. The organization estimates that 80 percent of the 16,000 workers who come to its 26 worker centers nationwide for help each year are victims of wage theft.

Low-wage workers and other vulnerable employees are most likely to experience wage theft, says Cecile Bereal, president and founder of RMA Management Alliance Inc., an HR consulting company in La Mesa, Calif., that advises organizations on diversity and compliance issues. These workers “know they’re not necessarily getting paid as they should … but they’re afraid that if they come forward, they’re going to get fired.”

Low-wage employees who are new to the country or the workforce face even greater risks because they may be unaware of basic wage and hour requirements.

However, “anyone who an employer feels they can take advantage of is vulnerable to wage theft,” Bobo says. “And I would argue that a lot of people are vulnerable in this economy.”

A survey of 4,387 low-wage workers found that 68 percent had experienced at least one pay-related violation in the previous workweek.

Wage Theft Offenses

  • Federal Fair Labor Standards Act violations and state wage and hour violations include:
  • Paying insufficient overtime (often related to misclassifying exempt and nonexempt positions).
  • Violating minimum-wage rules.
  • Off-the-clock claims.
  • Misclassifying workers as exempt instead of nonexempt.
  • Retaliation.
  • Misclassifying workers as independent contractors rather than as employees.

The 2008 survey was conducted jointly by the University of Illinois at Chicago’s Center for Urban Economic Development, the UCLA Institute for Research on Labor and Employment, and the National Employment Law Project. The research also showed that the typical respondent lost $51 out of weekly earnings of $339 due to workplace violations—which translates to an average of more than $2,600 annually, or 15 percent of earnings.

Pay violations are most likely to occur in industries that rely on low-wage workers, including fast food, retail, restaurant and hospitality, agriculture and livestock, and construction.

In recent years, large employers such as McDonald’s and Wal-Mart have been involved in well-publicized wage-theft settlements. Smaller companies have had problems as well.

Five years ago, Bereal conducted an HR audit for a 25-employee manufacturing company in California at which assembly workers were primarily female Mexican and Vietnamese immigrants. Bereal discovered that the assembly workers were not given breaks and were given less than 30 minutes for lunch. Some workers were paid less than promised. In addition, some of the workers were told by a supervisor that they were required to clean the company’s restroom even though the task was not part of their job description and they were not compensated for the janitorial work. “I came in and said, ‘You can’t do that,’ ” Bereal says. “And they essentially told me that I could leave.”

Not all instances of wage theft are intentional or egregious, although Bobo’s book and Bereal’s experiences feature plenty of examples that are both.

Cutting Through Confusion

Wage theft is complex and often confusing. Pinnock recalls that, when he first heard the term, he was unsure if the practice referred to hourly employees padding their time cards or employers stealing from workers.

“Wage and hour issues have perplexed employers since the 1930s,” says Pinnock, who notes that the 20th century wage and hour rules have not kept pace with the always-on, always-connected nature of 21st century work. Consider a situation in which a manager sends an after-hours text to her administrative assistant, who is nonexempt and therefore eligible for overtime under the FLSA. There may be a violation of FLSA rules if the assistant is not paid for compensable time. The time would be compensable if the amount of after-hours work exceeds the de minimis standard—roughly five minutes, but subject to interpretation—under the FLSA.

Similarly, nonexempt employees may lobby their managers for an “upgrade” to exempt classification in an effort to increase their status in the organization. But if the change is granted and the nature of the work does not warrant it, the employer could be in violation of the FLSA because the employees would not be paid the overtime to which they are entitled.

“This is not straightforward or easy to understand,” says Phyllis Hartman, SPHR, president of PGHR Consulting Inc. near Pittsburgh and a member of SHRM’s Ethics/Corporate Social Responsibility and Sustainability Special Expertise Panel.

Bobo brushes aside the complexity argument. “I’ve had some back and forth with people who say the laws are so complex,” she says. “But this stuff is not that complicated. … People are not making it a priority that workers are paid according to the law.”

Regardless of whether or not one agrees with Bobo’s assessment, compliance is not optional, and more states are adopting wage-theft statutes.

View from the States

More than a dozen states have enacted wage-theft prevention laws or are in the process of doing so. New York and California have extensive requirements, and some municipalities, including San Francisco and Seattle, also have wage-theft rules on their books.

These statutes “have recently become a hot topic in state legislatures and city governments around the country as many jurisdictions have moved to tighten up existing laws, give workers and government agencies new tools, and strengthen public and private enforcement,” says Susan Gross Sholinsky, a lawyer in the New York office of Epstein Becker Green.

While these statutes do not change basic Fair Labor Standards Act requirements, they generally contain two added provisions:

  • Notice or written-disclosure provisions requiring employers to provide employees with details about the frequency, calculation and method of their wage payments at designated times.
  • Enhanced civil and even criminal penalties for employers that are found guilty of violations.

In some cases, employers can face penalties from more than one relevant law—an FLSA violation for back wages as well as civil penalties from a state wage-theft prevention law, for instance.

HR’s Role

HR professionals “can play a vital role in mitigating the risk of wage and hour noncompliance,” says Andrea Kirshenbaum, a principal in the Philadelphia-based law firm of Post & Schell.

Bobo agrees. “HR professionals have a huge role in helping [their colleagues] understand that there are relevant wage-theft laws and that it is really serious if these laws are not followed,” she says. “There are consequences for the workers and, potentially, for your company.”

To avoid those consequences, wage and hour experts advise HR professionals to:

Raise awareness. HR should train management and nonmanagement employees annually regarding the organization’s wage and hour policies. HR also should facilitate open communication with workers, says Kirshenbaum, “and provide an opportunity for workers to express concerns regarding wage and hour compliance.”

In a previous HR role with an organization, Hartman would carefully explain to employees and managers the pros and cons of changing a job classification from nonexempt to exempt. She would use the discussions to educate employees and managers on wage and hour risks.

Review job descriptions and duties. In most organizations, potential job misclassification errors that can contribute to pay violations tend to focus on a relatively small set of employees. “There might be some people in question when it comes to determining who should not be exempt,” Bobo says, “but there are probably an awful lot of people for whom this is not an issue.”

Exempt positions generally involve more exercise of judgment and discretion than nonexempt positions. Pinnock regularly reviews job descriptions and digs deeper when he discovers exempt positions that contain a lot of task-based duties, such as updating spreadsheets or cross-referencing lists. If Pinnock believes a position may be misclassified, he discusses the matter in more detail with the manager and also interviews the employee to find out what work is routinely performed.

When interviewing employees, talk to them about what they actually do in the course of a day’s work. “Ask them what they did first when they got to work yesterday, what they do on Thursday morning or what they spend most of their time doing,” says Pinnock. Those are the kinds of questions people from the Department of Labor ask during wage and hour investigations.

Monitor requests for interns and volunteers. If a particular division or department starts hammering HR with requests for volunteers or interns, take a closer look to ensure that they are not being misclassified.

Bobo says an internal mandate to “keep payroll costs down”—by turning to volunteers or interns, for example—can create a heightened risk for wage theft. “The message can’t be, ‘Just keep payroll costs down,’ ” Bobo says. “It has to be, ‘Keep payroll costs down and comply with the law.’ ”

Blow the whistle. When the state of California unveiled its statewide, multilingual “Wage Theft Is a Crime” educational campaign in early May 2014, California Labor Commissioner Julie Su asserted that “honest employers shouldn’t have to compete against wage-theft violators.”

Bobo encourages ethical companies to report violations when they learn that competitors are not complying with wage and hour laws. Wage theft enables a company to operate with lower labor costs, giving it an unfair advantage and allowing it to offer its products or services at a lower price than competitors.

Conduct an audit. An audit of wage and hour practices by an external legal counsel can help an organization measure compliance with existing laws and take steps to address potential problems, according to Kirshenbaum.

HR consultants and employment lawyers typically offer these audits. Audits should be customized to each individual organization and should reflect industry-specific wage and hour risks. “An audit of a workforce that is predominantly exempt likely would not focus on whether off-the-clock work is being performed by nonexempt employees,” says Kirshenbaum. “Similarly, any audit of a restaurant likely would involve analysis of the tip-credit and any tip-pooling arrangements.”

It is important to follow through on the audit’s findings by changing any processes or behaviors that might put employees at risk of wage theft. While that sounds like common sense, Bereal attests that it does not always happen. While the majority of her clients make appropriate changes, some smaller companies have preferred to keep the status quo even after hearing potentially troubling audit results.

“We’ll have a conversation, and they say something like, ‘Oh, we don’t have to worry about that because we’re just a small business and we’re under the radar,’ ” Bereal says. “And I tell them … with all the attention on wage theft today, there is no way to get under the radar.”

Eric Krell is a business writer based in Austin, Texas, who covers human resource, finance and social marketing issues.

Web Extras

SHRM toolkit: Complying with U.S. Wage and Hour Laws and Wage Payment Laws
SHRM article: Give Me a Break
SHRM article: Time Is Money: On or Off the Clock?
Webpage: Compliance Assistance—Wages and the Fair Labor Standards Act (U.S. Department of Labor)
Webpage: Wage Theft: Laws Protecting Workers (National Consumer League)
Webpage: Wage Theft: Six Common Methods (National Consumer League)


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