Lawsuits filed under the Fair Labor Standards Act (FLSA) spiked 10 percent to a record high last year. Here's how companies can avoid them.
In the past year, more employees sued for unpaid overtime: lawsuits filed under the Fair Labor Standards Act (FLSA) spiked 10 percent to a record high 7,764 cases. Given recent losses by the plaintiff’s bar—most notably, the Wal-Mart v. Dukes decision—a decrease in cases might have seemed more likely. So what explains the spike and how can companies avoid them?
Noah Finkel, one of the partners with Seyfarth-Shaw who compiled and analyzed data from the Federal Judicial Center, offered several explanations, all of which built on developments in the 2000s. First, a major decision in 2000 which found that insurance adjusters were owed overtime triggered a big increase in filings. The adjuster case, Finkel says, shows that ‘the FLSA really is designed for a manufacturing world and thus is challenging for employers to apply to an information- and service-based economy.’
Employers are being sued more often because determining which employees are exempt from overtime isn’t as easy as it was when manufacturing jobs dominated the work place. A major facto in determining whether an employee is exempt is how much discretion the employee needs to use to do their job. In the manufacturing era, discretion was a good proxy for determining managerial status or employees other wise considered exempt from overtime requirements.
Now, ‘[t]echnology and standardization has caused jobs to evolve so that they involve less discretion but require a high level of skill,’ says Finkel. As a result, ‘the workers in these jobs often are considered non-exempt from the overtime rules, but otherwise look like workers who traditionally were exempt.’ This economic shift, Finkel says, is why ‘[d]iscretion should no longer be the only good proxy for the kinds of workers who should be exempt.’
Dan Getman, partner at Getman & Sweeney, an employee-side wage and hour firm, says, ‘Many companies just look at what their competitors are doing and don’t seem to be looking at whether or not they are paying people correctly.’ Instead, Getman says, ‘companies should start with the presumption that every position is entitled to be paid overtime for overtime work unless there is a specific exemption which the position clearly meets….Unless that analysis is done and done carefully, employers should not be surprised they are being sued for overtime pay.’
Finkel attributes much of the increase in lawsuits to ‘a critical mass of plaintiffs lawyers knowing about the law and basing their business model on it.’ Getman agrees, adding that ‘There are waves of litigation for different industries. More and more all sectors of the economy are being examined and subject to litigation,’
To prevent your company from being targeted for such lawsuits, Getman suggests companies simply comply with the FLSA as it written. ‘The principles of the FLSA are what they are. The situation is that certain positions are exempt and certain ones are not. It’s true the world is changing, but it’s always been changing. The principles have been the same for 80 years and it’s really not that complicated if you take a close look at it to determine if a position is exempt.’
In fact, Finkel emphasized advice that he’s been giving for a decade is still relevant: ‘Companies should make the investment to conduct an audit or assessment to determine where they are vulnerable and then implement the wage-hour solution to minimize their risk. Usually a very large part of the assessment is determining if employees are correctly classified.’ After sorting out the obviously exempt and non-exempt workers, Finkel explains, the key work is ‘examining details of the [other] employees’ actual work, because ultimately that is what will decide a case.’
Getman suggests companies raise the risk of FLSA litigation by carelessly classifying workers as independent contractors instead of employees. ‘Generally companies don’t pay independent contractors time and a half, so if there is litigation and the workers are found to be employees, the employees have a significant claim for damages.’
He flagged another type of worker who, if successful in an FLSA case, would have a large claim: salaried employees. Getman explains, ‘If you are paying them a salary then every additional hour isn’t time and a half, it’s free work. There’s an incentive to add more and more hours onto any job for which the company is not paying time and a half. And that scenario plays out until somebody quits or is fired and sues.’
The resulting damages can be astronomical: ‘For salaried employees it can be 1.5 times their regular hourly rate (salary broken down into a 40 hour work week) times two for liquidated damages, plus attorney fees and cost. Some state laws may have additional penalties on top of that,’ Getman says.