As those who follow this area of law know, the rate of recovery by plaintiffs also is far higher than in traditional employment discrimination claims. Even minor, technical violations of the FLSA can lead to significant payments of the employee’s attorney fees. Also, many cases turn into collective actions, which are the FLSA version of class actions, with multiple employees seeking damages for a defective pay practice that then spirals into major financial liability for the unfortunate employer.
Despite the prevalence of these cases and the significant financial risk they pose, too many employers continue to “wish away” the possibility of such claims. Worse, they don’t take inexpensive and proactive steps to reduce the likelihood of a suit or limit their damage exposure should a case be brought against them. Here are six simple steps every employer can and should take to minimize their financial exposure to FLSA lawsuits:
1. Audit your exempt workers to make sure they meet DOL guidelines to avoid paying overtime; 2. Make sure salary deductions for exempt workers are lawful, and you don’t jeopardize their exempt status with wrongful deductions; 3. Add sign-offs to your Electronic Time keeping Systems so that employees specifically certify that the recorded hours are correct 4. Update your written FLSA safe harbor and pay policies to keep employees from fabricating claims or being forced by wayward supervisors from working without being paid; 5. Implement arbitration agreements to prohibit class/collective action claims so you don’t become a class action “statistic;” and 6. Consider buying an employment practices insurance policy, which now often provides both defense cost reimbursement and indemnity for unpaid wages.
The specifics regarding each of these pro-active steps are covered in more detail below.
1. Audit Your Exempt Workers
The most common FLSA claim is for unpaid overtime due to an employee being misclassified as “exempt” from the obligation to pay overtime for hours worked over forty in a seven day workweek. Most of these claims arise due to employers either mistakenly believing an employee’s job duties qualify for exemption or that any “salaried” employee is automatically exempt.
The categories of jobs that qualify for exemption are actually quite narrow. Typically, only managers who supervise two or more employees, professionals such as lawyers or doctors, certain administrative positions, or outside sales positions qualify. Many employers falsely believe that a “highly paid employee” should be exempt, when the rules only reference those making more than a $100,000 annually may qualify. Or, employers attach the title “administrative” to a variety of jobs that simply do not qualify for this exemption from overtime, which is a category far more narrow than most employers believe.
The reality is employers must audit their exempt jobs to insure employees are correctly classified. Without doing so, employers risk what often are catastrophic damages when multiple employees are incorrectly believed to be exempt.
2. Make Sure Salary Deductions are Lawful
Another claim that is very prevalent are cases alleging that the employer made illegal deductions from the employee’s salary. The result of illegal deductions can destroy the otherwise exempt status of the employee, making the employee eligible for overtime. Many times, this happens when the employee makes full or partial deductions from the employee’s salary when the employee is absent from work.
The DOL rules specifically allow deductions in only a few situations:
–When an employee is absent from work for one or more full days for personal reasons other than sickness or disability; –For absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for salary lost due to illness; –To offset amounts employees receive as jury or witness fees, or for temporary military duty pay; –For penalties imposed in good faith for infractions of safety rules of major significance; –For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions; — In the employee’s initial or terminal week of employment if the employee does not work the full week; or –For unpaid leave taken by the employee under the federal Family and Medical Leave Act.
Other than these exceptions, deductions to an exempt employee’s salary are unlawful and will automatically convert the employee to a non-exempt employee who is entitled to overtime pay.
3. Add Sign-Offs to Your Electronic Time-Keeping Systems
Many employers in recent years have installed electronic time keeping systems that record time worked by allowing employees to log in on their computer or even on mobile phones. These systems allow for substantial efficiencies in payroll computations, but can raise problems with FLSA documentation where there is no electronic “verification” by the employee that the hours recorded by the electronic system are correct. Many times employers install these systems and do not allow the employee to review the hours computed or don’t have the employee see corrections made when the employee forgets to “swipe-in” or “swipe-out.”
Unlike paper time cards that employees complete themselves, there is often no verification review process by employees who use electronic systems. If an employer has an electronic time-card system, it should have a process where the employees can enter into the system and complete an electronic “sign-off” on the time entered and certify that the hours recorded for them are correct. Without that protection, an employee can easily claim that the time entered was incorrect, that they “forgot” to sign in, or otherwise did not record the time correctly.
4. Update Written Policies
Many employers also have defective written policies or fail to have policies that are crucial to stopping litigation or winning the case if a suit is filed. Initially, every employer should have a “safe harbor” provision, which makes clear that any inadvertent or wrongful deductions from the salary of an exempt employee will be corrected. The DOL rules specifically set forth the language needed for a compliant safe harbor provision so that you can limit liability for wrongful deductions to the time period the deduction applied.
Also, employers should have an express policy setting out that each employee who has a lunch period must take that meal break, that it should not be interrupted, and that, if they don’t take the meal period, they must include the time on their record of hours worked. The policy also should make clear that no one has authority to work an employee “off the clock.” The policy should further state that if anyone does preclude the employee from taking a bona fide meal break or attempts to have the employee work without pay, the employee must complain in writing to the appropriate company official. A policy of this nature will help eliminate claims where employees contend that they were “never allowed” their meal period or that they were “forced” to work before or after regular work hours without compensation.
An employer’s pay policy also should cover directions for recording time, whether it is on a written time sheet or electronic system. No employee should be allowed to enter time for others. Also, make clear that any false entries will lead to termination.
5. Implement Arbitration Agreements
The prospect of collective/class actions can keep even large employers awake at night. Relatively minor technical compliance issues can still amount to hundreds of thousands of dollars, or even millions of dollars in liability when a claim is expanded to many employees. One of the biggest advantages of making employees sign mandatory arbitration agreements is that you can specifically prohibit the employee from bringing a collective/class claim.
While the NLRB has attempted to outlaw arbitration provisions restricting class claims, many believe that federal courts will take a hostile view of the NLRB’s attempt to restrict the use of arbitration agreements to prevent class actions. While the ultimate outcome is yet to be decided, we continue to believe that prudent employers should utilize such agreements and particularly insert provisions banning class claims, until and unless there is a definitive decision that class claims must be allowed under arbitration agreements.
6.  Consider Buying Insurance
Most major commercial insurance companies are now offering employment practice insurance policies that offer not only coverage for defense costs in FLSA claims, but now offer a sub-limit indemnity coverage for unpaid wages. In the past, most carriers offered only defense-cost reimbursement for FLSA wage claims, but now employers can obtain coverage for lost wages and for claims such as unpaid overtime or hours worked “off the clock.”
For smaller employers, particularly, coverage for defenses costs and indemnity for damages can allow potentially significant claims to be resolved with minimal financial loss. Without insurance coverage for FLSA lawsuits, at best, employers are likely to experience significant defense costs even if they are fully compliant. Unfortunately, defense costs in these cases can be very significant due to the highly fact-intensive nature of these cases.
For more information, contact Ben Mathis at bmathis@fmglaw.com or 770.818.1402.