Faced with reports of multi-million dollar overtime pay settlements, employers around the country are scrambling to put their payroll policies in order. And with good reason. Confusion over arcane regulations, economic incentives for non-compliance and complacency rooted in years of non-enforcement have combined to create widespread violations of wage and hour laws. The Department of Labor (DOL) estimates that 70 percent of employers are not in compliance with the federal Fair Labor Standards Act (FLSA), a number that would grow substantially if violations of state laws were factored in.
With the number of class actions for wage and hour violations now exceeding all other types of employment class actions combined, employment lawyers are urging their clients to conduct audits and review payroll policies.
It's not a simple task. A tangled web of state and federal regulations threatens to snare the unwary employer while offering plaintiffs' attorneys easy access to a big payday.
"This is not common sense like sexual harassment, where you can just think about how you would behave if your wife was behind you with a baseball bat," says Paul Siegel, partner at Jackson Lewis.
Employment attorneys urge a proactive approach--instituting new policies and training programs. Such steps may fend off an FLSA claim, or at least mitigate liability for an expanded statute of limitations and liquidated (double) damages that can be imposed on "willful" violators.
"You can't afford to take the ostrich approach and stick your head in the sand," says Lisa Schreter, shareholder in Littler Mendelson's Atlanta office, "because you are inviting someone to come along and kick you in the pants."
The first step is a thorough audit of payroll practices and exempt versus non-exempt job classifications. Siegel recommends an attorney be involved so the audit results are privileged.
The audit should answer the following questions: Do I know who is exempt?; is time recorded accurately?; and am I preserving time and payroll records so I can produce them if there is litigation?
That doesn't have to be an overwhelming task.
"Employers are scared of audits," says Brian Bulger, partner in Meckler Bulger & Tilson in Chicago. "They will say, 'I have 3,000 job titles--how do you audit that?' But there are a huge chunk that are exempt and a huge chunk that aren't. What you need to look at is the gray area in the middle."
Similarly, Gerald Maatman Jr., co-chair of the class action practice at Seyfarth Shaw, recommends listing jobs in the company from lowest paid up and drawing a line where exempt and non-exempt positions meet.
"Look at the jobs that are 10 percent above the line and 10 percent below," he says. "Re-examine their job descriptions to make sure you are in compliance and recalibrate the job requirements so they are either clearly exempt or clearly non-exempt."
Those job descriptions should be reviewed periodically to see if there have been changes impacting exempt status, such as layoffs that leave a supervisor without subordinates.
Bulger notes that you can't base your classification on whether the employee is paid a salary or what his or her job title is. Instead, you need to carefully review DOL rules. For example, while outside sales people are generally exempt, most inside sales workers aren't.
The audit also should examine how the company calculates overtime pay. Bonuses, shift differential and incentive pay must be included in the base rate from which overtime is determined. Employers frequently wrongly assume that incentives and performance rewards don't have to be included. "That's one of the most common violations [of FLSA] that I see," Schreter says.
Schreter recommends distributing a payroll reporting policy that tells non-exempt employees not to work off the clock and defines what working time is, with a toll-free number for reporting violations.
She points out that last year's unanimous Supreme Court decision in IBP Inc. v. Alvarez has important implications for how the workday is defined. The court ruled that time spent putting on and taking off protective gear and then walking to and from the job site was compensable under the FLSA.
"Alvarez is the sleeping dog that the Supreme Court kicked," Schreter says. "Many employers have mistakenly assumed that Alvarez does not have implications for them because they don't have employees donning or doffing protective gear. But what the Supreme Court said is that when you engage in a principal work activity or something that is indispensable to a principal work activity, it is compensable."
That could extend to time spent on phone calls made by a supervisor to an employee at home, or reading company e-mail messages prior to beginning work (see Sidebar).
Steven Catlett, partner in Jones Day's Chicago office, points out that the law does not let employees volunteer extra time.
"If my secretary wants to spend 15 minutes at the end of the day to get something done, I can't let her do that," he says. "You should have a company policy telling your employees not come in early to work without recording it."
Siegel also suggests revising severance policies to include a provision specifying that no overtime has been worked that has not been paid.
Once policies are in place, training is important. New employee orientation should cover payroll policies and instructions on filling out a time sheet, Schreter says. And front-line managers, who may push employees to work off the clock or even alter their time records to meet productivity goals, need training on how to schedule and manage their employees' workload.
The Cost of Inaction
Schreter illustrates a common response of overwhelmed employers facing up to wage and hour compliance with an image of a deer caught in the headlights.
"Sometimes people freeze up. It seems to be too much, so they go with inertia because the idea of changing is too hard." But she points out that the law is particularly harsh on those whose inaction leads to charges of "willful violation."
The statute of limitations on filing FLSA claims is two years, but if a plaintiff can prove "willful violation" by the employer, the time frame expands to three years. Additionally, some courts have held that employers who willfully violate the law are liable for double damages. On the other hand, the law provides for a "good faith" defense that involves proving the employer had "reasonable grounds for believing" its actions did not violate the FLSA.
"A carefully planned audit and consistently enforced policies are the foundation of the good faith defense," Schreter says. "There also needs to be management buy-in that if you find violations, you will address and correct them. If you take no steps to correct them, you run the risk of a plaintiff proving willful violations of the act."
Tools designed to make work life more efficient also make employers more vulnerable to wage and hour lawsuits.
For that reason, BlackBerries and other technologies that create a 24/7 connection with the workplace simply shouldn't be given to non-exempt employees, says Lisa Schreter, a shareholder at Littler Mendelson.
A BlackBerry user herself, Schreter is aware of how addicting the technology can be. Whether the employer intended it or not, the BlackBerry-enabled employee is likely to read and respond to messages from managers or customers outside regular working hours.
"There will be a number of employers hit with 'off the clock' cases because an employee is engaging in work the employer was not consciously aware of," Schreter says. "You will have a hard time proving that you didn't know he was working beyond the standard workday if you give him a BlackBerry. If you get a message at 7 p.m. from the employee, he can use that to make a case that he is owed overtime pay."