Gambling With The Fair Labor Standards Act: A Multi-Million Dollar Wager

By, Kimberli Aboyade, Esq., Eckert Seamans Cherin & Mellott, LLC

U-Haul, $7.5 million; Pizza Hut, $10 million; Starbucks, $18 million; Taco Bell, $13 million; Bank of America, $22 million; Rite Aid, $25 million; Pacific Bell, $35 million; Farmers Insurance, a whopping $90 million.

Verdicts like these are causing employers across the country to take a close look at a Depression-era federal law, the Fair Labor Standards Act (FLSA). It takes only one FLSA complaint by one employee to trigger a lengthy investigation and costly litigation.

FLSA requires overtime pay for all workers who work in excess of 40 hours per week. Its intent is to keep employers from exploiting the American worker. More than six decades after its enactment, however, employers are violating the FLSA more than ever, usually without even knowing it.

The root of the problem is that the law provides an exemption for certain classifications of workers who are not compensated on an hourly basis. Confusion over who is exempt results in improper classifications and expensive lawsuits.

All of cases mentioned above resulted from the misclassification of employees, most of them unintentional. Misclassification may occur for several reasons:

-- A employer may inadvertently misclassify employees simply because it does not want to change old procedures or because it doesn't understand the nuances of FLSA. The exemption analysis can be confusing. The Department of Labor developed the legal concept of exempt employees more than 50 years ago, in a work environment much different from today's. A boom in hiring "knowledge workers" has created a new set of jobs that have never been classified.

-- Sometimes employers comply with FLSA, but ignore state laws. Many state laws, such as those of California, New York, Michigan and Florida, are more generous to employees than FLSA. If the state law is more beneficial to employees, the state laws prevails over FLSA.

-- Some employees prefer an exempt classification because of their professional or managerial status and the financial security of receiving the same amount of pay each week. Employers are happy to accommodate these employees because it makes payroll easier to administer.

-- Employers may attempt to reduce costs by asking mid-to-lower level managerial exempt employees to do work that is normally done by non-exempt workers.

To avoid litigation, a employer should make sure that employees are correctly classified under FLSA and corresponding state laws. There are four FLSA classification categories of exempt, "white-collar" employees:

-- Executives (managers)
-- Administrators
-- Professionals
-- Outside sales representatives.

The exemption hinges on the actual duties the employee performs, not the job title. For example, an exempt employee is one who exercises independent discretion and judgment without supervision.

The legal question to answer when conducting an exemption analysis is whether the employee meets the "primary duty" test -- what do these employees spend most of their time doing? It's not as simple as giving the employee a managerial or professional title or paying him or her a fixed monthly salary. Generally, exempt workers manage, think, direct, supervise, and establish. The more routine or mundane the position or the more manual the work, the less likely that the worker is exempt. The lowest-paid salaried workers are misclassified the most often, because their duties may veer into the routine or manual.

An employee should be classified as exempt only when he or she meets every exemption criterion. If there is a doubt, it is best to play it safe and classify the person as non-exempt.

To further complicate the issue, the Supreme Court has ruled that if an employer deducts a portion of exempt employees' pay for partial-day absences, those employees lose their exempt status. Simply having a policy stating that it will dock salaried workers' pay for tardiness of more than 15 minutes creates a "significant likelihood" that an exempt employee is not exempt, regardless whether any pay is ever actually deducted.

The statute of limitations on back pay under FLSA is three years for willful violations and two years for non-willful. Most recent decisions have given employees three years' back pay.

FLSA also allows for liquidated damages, which are similar to punitive damages except that the amount is predetermined rather than decided by the judge or jury. Liquidated damages equal the amount of the back pay owed. Other costs include interest on the back pay, plaintiffs' attorney's fees and court costs. The Department of Labor also allows for fines. Once interest and attorneys' fees are added to the $90 million Farmers Insurance settlement, the result of the misclassification of 2,400 adjusters, the final cost to the employer will likely exceed $130 million.

More high-profile cases are in the pipeline. The verdict is still out in cases against Tyson, Denny's, Wendy's, Coca-Cola, Borders Books and Wal-Mart. Pepsi Bottling is appealing a $100 million ruling. Even the federal government is at risk. Federal prosecutors claim that it owes them $1 billion in overtime.

No employer is immune. The recent large settlement have encouraged plaintiffs' attorneys to scout for industries and employers to target. Once a big verdict is announced, they advertise in local newspapers and industry trade publications soliciting clients. They contact unions and offer free consultations. The need for a employer to conduct an FLSA of its employees is all the more urgent now.

Sidebar: Preventing FLSA Suits

It takes a complaint from just one employee to trigger an FLSA investigation and litigation that can drag on for years and drain a employer of its resources. Here are five things a employer should do to protect itself against lawsuits.

  1. Always seek an attorney's guidance on FLSA and applicable state laws with any wage/hour issues and certainly before establishing or changing any pay policies and job classifications.

  2. Do not exempt employees who do not meet every requirement for exemption.

  3. Conduct a self-audit with your attorney: ask your employees to describe how they spend their workdays and change their classifications if they are not in compliance with FLSA.

  4. Review your pay policy to ensure that it does not provide for partial-day deductions for exempt employees.

  5. Be certain that formal job descriptions match what your employees actually do.


Kimberli Aboyade is an attorney with Eckert Seamans Cherin and Mellott, LLC focusing her practice on employee law litigation. Telephone: 412-566-6000.

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