Over the past six years or so, wage and hour lawsuits have become, if not commonplace, extremely prevalent. This trend, fueled by a large number of workers displaced following the financial crisis and stoked by successful settlements and court rulings over the past several years, is unlikely to end anytime soon.

According to the consulting firm NERA Economic Consulting, wage and hour settlements for U.S. companies totaled $467 million in 2012, consistent with past years. Companies, on average, paid $4.8 million in order to resolve a case in 2012, which is slightly higher than the $4.6 million companies paid in 2011. Furthermore, the median settlement value for wage and hour cases in 2012 was $1.7 million. Finally, overtime claims were the most prevalent in 2012, equaling 40 percent of the allegations examined by the NERA Economic Consulting study. Since 2007, overtime, misclassification, and donning and doffing claims have remained constant. Figure 1 shows a breakdown of wage and hour allegations brought in 2012, from NERA Economic Consulting’s survey:

As the chart in Figure 1 demonstrates, overtime claims are the most prevalent wage and hour allegations, followed by missed meals and breaks, misclassification, and off-the-clock work allegations. Many wage and hour lawsuits combine different violations — a common theme being both overtime and misclassification suits. In order to avoid wage and hour liability, employers need to be sure they are complying with all the relevant minimum wage, overtime, and other wage- and benefit-related regulations.

Fair Labor Standards Act and Other Law

Wage and hour law is regulated by both the federal Fair Labor Standards Act (FLSA) and a variety of divergent state laws. It is important for employers to ensure that they remain compliant with all applicable regulations. The Wage and Hour Division of the Department of Labor conducts investigations of alleged FLSA violations. When, pursuant to such an investigation, the Department of Labor (DOL) determines that a company is not in compliance with the FLSA, the agency can impose penalties and fines, including payment of back wages. The NERA Economic Consulting study found that over 25 percent of the companies who settled wage and hour suits in 2012 had been found by the DOL to have an FLSA violation. Assessed back wages associated with those violations totaled $18.8 million.

Many wage and hour lawsuits are brought as class action suits unrelated to DOL enforcement activity. Although, according to the NERA Economic Consulting study, extremely large class action wage and hour suits (those with 10,000 or more plaintiffs) have declined, smaller class action proceedings have continued. The study shows that the number of wage and hour lawsuits brought has continued at the same pace as recent years.

Staying Out of Trouble

In order to stay out of wage and hour trouble, employers should consult with legal counsel to ensure that all applicable federal, as well as state wage and hour laws are complied with. In addition, employers should carefully review the topics that follow to ensure that they are paying all employees properly.

  • Classify workers properly. Determining who is exempt from overtime pay is not always straightforward. In fact, many wage and hour lawsuits allege that the employer has misclassified employees, thereby ultimately underpaying those employees for overtime. Employees are either classified as “exempt” or “non-exempt” employees. Exempt employees are exempt from the protections of the federal and state wage and hours laws, such as the overtime requirements. Exempt employees under federal law are generally “executives,” “administrative” and “professionals.” The “administrative” exemption is where many employers misclassify workers. Merely because someone is paid a salary does not always mean they are properly exempt. Non-exempt employees are generally covered by federal and state wage and hour laws.

Under the FLSA, in order to classify a position as exempt, that position must pass both a salary and duties test. In addition to the salary test (a minimum required salary of $455 per week), there are four major categories of duties: (1) executive; (2) administrative; (3) professional; and (4) outside sales. Duties to look for include: directing and supervising the work of others; having the authority to hire, fire, and promote; exercising independent judgment and discretion; and advanced knowledge in a field of science and learning through prolonged course of instruction.

It is important to thoroughly discuss any classification with legal counsel since the test and distinction between exempt and non-exempt is not clear-cut. In addition, divergent state laws complicate the test. In the majority of wage and hour suits involving misclassification, the employer made a good faith effort to correctly classify its employees, but many times failed to do so properly.

  • Ensure donning and doffing compliance. Donning and doffing allegations, although not as prevalent as overtime or misclassification claims, continue to be brought with regularity. Good faith does not avoid liability in certain industries. Generally, donning and doffing protective gear, otherwise referred to as PPE, is work time under the FLSA and must be compensated. Employers that require such equipment should review their practices to ensure that the time spent donning and doffing such gear is being accounted for in their payroll practices.
  • Watch out for tool mistakes. In addition, many employers commit tool allowance mistakes. The Occupational Safety and Health Act requires employers to provide certain safety equipment, and many states have associated laws. Other equipment can be deducted from an employee’s wages, but some states require a written paycheck deduction authorization from the employee. However, under no circumstances should a wage deduction drive an employee’s wages below the minimum wage (whether federally or state-mandated). This can be problematic when the employee makes only slightly more than the minimum wage.
  • Review payroll practices and job classifications. Employers should periodically review how employees track their hours. Laws change, job classifications get reworked, and new technology can make the process easier and less prone to errors. Under the FLSA, the onus of keeping track of employees’ time falls on the employer, regardless of whether the employee is required to clock in and out. Employers should work to have solid overtime and timekeeping practices in place, to ensure that wage and hour laws are being followed. Being proactive in finding wage and hour errors in your business can help cut off wage and hour lawsuits or government investigations before they begin.
  • Conduct audits. In conjunction with being proactive, employers should also routinely conduct audits. A spot check of one site or department may reveal that employees are not tracking hours properly or that supervisors are not following established procedures.
  • Be particularly careful with union employees. At union shops, the number of hours that employees work is not just reflected in their paychecks, but in many cases is used to calculate contributions to pension and benefit funds. In these situations, employers can get into even more trouble when they shortchange such funds. If you have union employees, pay extra attention to how those employees’ hours are tracked to be sure that you are complying with your collective bargaining agreement.
  • Know state and local laws. State and local laws can be more protective and stringent than federal law. Employers should consult with legal counsel to ensure that their company is in compliance with all applicable laws and ordinances to best avoid wage and hour liability.

 Wage and hour lawsuits have become a staple of the plaintiffs’ bar because of their ease of proof. As the recent numbers demonstrate, such lawsuits are not going away anytime soon. Employers need to be aware of the liability such lawsuits can pose and take action to ensure compliance now, before the Department of Labor begins an investigation or an employee brings a class action lawsuit.