Wage Woes

Exaldo Topacia often missed his daughter's piano recitals and softball games during the year he spent installing and maintaining computer software and hardware for IBM's New York support division. Now he wants the company to pay him back overtime for the 45 to 50 hour work-weeks he says he often put in. Early this year, Topacia joined current and former IBM technical support workers seeking to represent tens of thousands of workers nationwide in a suit alleging violations of federal and state wage and hour laws. Filed in U.S. District Court in San Francisco, the complaint may turn out to be the largest overtime class action in history.

IBM is the latest corporation to fall victim to an explosion of wage and hour litigation. Last year, insurance giants State Farm and Allstate agreed to pay $135 million and $120 million respectively to claims adjusters who asserted their right to overtime pay. And a quick scan of this year's headlines shows employers in a range of industries socked with large settlements or verdicts:

-UBS pays $89 million to financial advisers to settle overtime suits.

-Jury awards Family Dollar Stores managers $19.1 million in overtime pay.

-Careerbuilder.com settles Labor Department overtime complaint for $500,000.

"The numbers are mind boggling," says Michael Gray, partner in the Chicago office of Jones Day.

The story of escalating wage and hour litigation extends to small companies as well as the big name corporations that make the news. Every day in California, five to 10 wage and hour suits are filed, according to Gray. Meanwhile, plaintiffs filed 3,000 suits in 2004 under the Fair Labor Standards Act (FLSA), the vast majority of which were overtime cases. And the Department of Labor (DOL) stepped up enforcement actions, collecting more than $119 million for employees in back overtime pay in fiscal 2005, while levying $4.3 million in penalties.

The unsettling reality is that virtually any company can end up in the same boat as IBM and Allstate.

"If you look closely at any employer, you will find some violations of FLSA," says Stephen Fink, partner in Dallas-based Thompson & Knight.

Employment Eras

Paul Siegel, partner in the Long Island office of Jackson Lewis, sees the proliferation of wage and hour litigation as the latest in a series of employment law eras starting with wrongful discharge cases that dominated the 1980s and sexual harassment suits that characterized the 1990s.

As employers got smart about including employment-at-will statements in employee handbooks to minimize wrongful termination claims and instituted training programs to snuff out sexual harassment, the potential for winning those cases diminished.

Plaintiffs' attorneys looking for a new revenue source started to sit up and take notice of an untapped opportunity early in the new millennium. Wage and hour cases began to pick up after word spread of a few large verdicts in California overtime pay cases, including a 2001 judgment against Farmers Insurance for $90 million (which grew to around $200 million when it was finally awarded in 2005).

Publicity over a controversial 2004 revision of the federal overtime rules, which was intended to clarify who is eligible for overtime, heightened awareness among employees, including some white collar workers who realized for the first time that they qualified for overtime.

Meanwhile, employers were asleep at the switch. Many operated under the mistaken belief that all salaried employees are exempt from overtime, says Brian Bulger, partner in Meckler Bulger & Tilson in Chicago. In fact, only certain categories of employees defined by their job responsibilities are actually exempt.

"Employers got into a comfort zone, thinking if we pay them a salary, we can call them exempt," Bulger says. "Now it's catching up with them."

Complicated Compliance

A morass of federal and state rules complicates compliance. Just figuring out whether a certain group of employees is exempt can be tricky. For example, DOL regulations include an exemption for some employees in computer-related occupations, but plaintiffs' attorneys in the IBM case draw a distinction between computer programmers who develop software and computer technicians who install software. While the programmers are exempt, the suit claims the technicians shouldn't be.

"This is not common sense," Siegel says. "Wage and hour rules are an ancient series of regulations on top of regulations on top of opinion letters. It's hard to know what the DOL wants."

While many recent cases have focused on traditionally exempt employees such as investment advisers and claims adjusters arguing they are entitled to overtime, another trend has been cases filed by nonexempt workers who say they are asked to work "off the clock" or have job duties before or after their workday for which they are not compensated, says Steven Catlett, partner in Jones Day's Chicago office.

In November the U.S. Supreme Court raised the stakes, ruling that time spent donning and removing protective gear and walking to and from a workstation is part of the workday for which employees must be compensated. Plaintiffs' attorneys now are challenging employers over time spent booting up a computer or reading company e-mail before starting work.

Adding to the confusion are some state laws that exceed the federal requirements.

"Many employers think if you are in compliance with the federal law you are in compliance with the state law, but that is not at all the case," Catlett says.

California has the most cases because it has the most employee-friendly rules, such as overtime requirements based on an eight-hour workday rather than a 40-hour workweek. But employers should not assume they are off the hook just because they don't have operations in the Golden State.

"The trend is now spreading east," says Gerald Maatman Jr., partner in the Chicago office of Seyfarth Shaw. "Illinois, Texas, Florida, New Jersey and New York also are experiencing exponential growth of wage and hour cases."

More to Come

There is no end in sight. Employment attorneys predict that the success of financial advisers will lead more white collar workers to seek overtime pay. Real estate agents may follow their lead, claiming their long hours entitle them to overtime even though their compensation is commission-based. Financial services, insurance and technology companies are likely to see more groups of workers file suits.

"They will claim they are the production workers of those industries," Bulger says.

While employers eventually will stem the tide of wage and hour cases by tightening up their payroll practices, much as they did their termination and sexual harassment policies in past decades, the fact that the laws favor employees will propel litigation for the foreseeable future.

"Any employment lawyer will tell you these are difficult cases for the employer," Fink says. "So there's no immediate prospect that these claims will go away."

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A Youthful Problem

Economic and demographic changes are playing a role in the growth of white collar wage and hour cases, says Sheryl Willert, managing director at Williams, Kastner & Gibbs in Seattle.

She points out that many recent overtime cases involve highly educated young people who consider themselves professionals, received bonuses or stock options and once would not have questioned their exempt status.

"When the economy went into the toilet, a lot of people saw their bonuses and stock options degrading in a manner that put them at an economic disadvantage," she says. "In industries where you were expected to work 50 to 60 hours a week, people felt undervalued."

Willert also cites generational differences. While Baby Boomers believe long hours are a prerequisite to financial success, their children think they should have time for family activities and a large paycheck, too.

"There is a feeling of entitlement among this generation," she says.

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