Once considered a minor nuisance, wage and hour lawsuits are now one of the biggest concerns facing in-house counsel.
Not only have they outpaced all other workplace actions since 2005, multi-million dollar verdicts and settlements are being regularly rung up as a result of class action certifications.
“The growth in this area has been phenomenal – we’re seeing twice the number of [wage] actions that we did a few years ago,” said Allan G. King, co-chair of Littler Mendelson’s class action practice. Even defense verdicts can be painful because they typically involve complex, lengthy trials, he added.
Wage and hour actions started quietly multiplying more than a decade ago, and have ensnared numerous industries in the tentacles of multiple claims, such as: forcing hourly employees to work “off the clock;” misclassification of salaried workers who should have been paid on an hourly basis; and failure to compensate for time spent “donning and doffing” required uniforms. (See “Top 10 dangers” below.)
Several catalysts are responsible for this litigation explosion, including the willingness of many courts to certify class status for a variety of claims that would not be worth much individually but are huge in the aggregate.
On May 31, for example, the New Jersey Supreme Court granted class certification for 72,000 past and present Wal-Mart employees, stating that case management problems cited by trial and appellate courts could be overcome.
“By equalizing adversaries [with class action certification] we provide access to the courts for small claimants,” wrote Chief Justice James Zazzali in Iliadis v. Wal-Mart Stores, Inc.
Wal-Mart has faced dozens of actions in recent years, suffering one verdict for $172 million and settling other claims. But Wal-Mart is hardly alone. Others in the retail, hospitality, financial services and pharmaceutical industries have been hit hard. (See “Ringing up the damages” below.)
“There is no end in sight for this trend because the legal issues are complicated and there is little law being established with all the settlements,” said Richard L. Alfred, head of Seyfarth Shaw’s wage and hour litigation. Alfred said client requests for employment audits are rising along with misclassification claims. “Good audits can help you to adjust the grey in your employment practices to white,” he observed.
Michael A. Alaimo of Michigan-based Miller Canfield agreed, saying audits can help in-house lawyers who want managers to legally align job descriptions and responsibilities. “Familiarity breeds ignorance,” Alaimo said. “Some [managers] think they know more than they do after light training, but they have only ‘tip of the iceberg’ knowledge about the 500 pages of regulations under the Fair Labor Standards Act.”
Lawyers say audits are one of many steps that companies can take to avoid falling prey to the wage and hour monster. (See “Taming the monster” below.) They also called out the importance of spotting and resolving seemingly unrelated workplace issues quickly. “All of the collective actions I’m handling now were started by employees who were disgruntled for another reason, such as one that grew out of a non-compete dispute,” said Jonathan W. Greenbaum of Nixon Peabody’s Washington, D.C. office.
“The good news is that some recent decisions help employers [and] these are winnable cases,” said Susan McWilliams of Nexsen Pruet in South Carolina, who added that effective settlements require savvy communications to keep suits from multiplying.
How plaintiffs seize victories
King said the first “wave” of successful class actions targeted assistant managers who were misclassified as executives “exempt” from FLSA protections.
While that wave was building, plaintiffs launched a second attack on stockbrokers, salespeople and other white-collar workers who didn’t meet the tests for professional or administrative FLSA exemptions.
“Some employers went over the line, but some practices that were followed for years were found to be improper,” King said.
Alfred added that recent history has showed that “employees have become smarter and now they are often more in tune with these exemptions than employers.”
Alaimo agreed, adding that “when a verdict or settlement hits the papers, it is free advertising for more work.”
Plaintiffs are now attacking a wide variety of technical failures to provide meal breaks, uniforms, or compensation for “donning and doffing” of protective gear used in factories, warehouses and laboratories. “The meat-packers, for example, are fighting claims for unclocked time donning leather aprons, face shields and other equipment at the start or end of a shift,” said Alaimo.
Along the way, plaintiffs have discovered several advantages, including the lower standard for bringing a “collective” action under the FLSA, which is softer than the standard for “class” action under state laws.
“For collective actions, plaintiffs generally must prove only that the employees were ‘similarly situated’ or affected by common policy,” said Greenbaum, noting that class actions require analyses of procedural burdens on the courts and other factors.
Greenbaum also pointed out that “collective” actions require plaintiffs to opt in, which many fail to do because they don’t understand the notice or don’t want to rattle their employer. But that too can boomerang. “Only about 10 percent typically opt in, but multiple suits against the same company stemming from one successful initial case are not uncommon when people wait on the sidelines,” Greenbaum explained.
King noted, “There is a lot of work involved in thwarting a class [or collective] because statisticians and economists are often needed to do accurate testing on [the commonalities of] class members.”
But the facts of a wage case are relatively simple compared to the law or the damages, and McWilliams said the ultimate “he said, she said” is attractive to plaintiffs, explaining that companies with flat organizational charts may go to a jury with testimony from a handful of managers against the word of dozens of plaintiffs.
McWilliams added thatsaid losing a wage and hour case has huge downsides, many of which are not monetary. “Besides the organizational distraction, morale and camaraderie can be negatively affected,” she said. A loss can become a rallying point for a union certification campaign as well, she warned.
Employers are also reluctant to roll the dice on classification findings because the law is often murky. “There is still a dearth of case law because cases are rarely brought affecting individuals and class actions are not going to appeal,” said King.
Where workforces are spread over many jurisdictions, “plaintiffs have another advantage because they can control the forum and choose the most liberal venue for finding class status and favorable rulings on the merits,” Alfred said.
The 2004 update in DOL regulations did little to settle classification questions, Alaimo said. “They specifically treated the case of insurance adjusters, but the general guidance still didn’t draw a bright line and that is hard to do because every company operates differently.”
Greenbaum suggested plaintiffs are riding “a perfect storm” of momentum now, aided by “more frequent takeovers and displacements, a younger generation that is less intimidated, and a workforce that has less unionization.” Ironically, the drop to seven percent private sector unionization has rendered it impossible for most employers to use FLSA collective bargaining exemptions to set their own wage rules by union contract.
Legal complexities confound employers
The law in this area is tricky and provides much fodder for plaintiffs to attack employers at both the state and federal levels. “Too many employers simply classified employees as ‘exempt’ based on salary, and that was a big mistake,” said King.
Alaimo explained that the FLSA – now 70 years old – is the source of one of the biggest problems, namely, the misclassification of workers. As part of the New Deal, it guaranteed eight-hour days, 40-hour weeks and regular breaks for a workforce that was largely industrial and unionized.
“It provided for time-and-a-half overtime pay to keep workers from being exploited, but in 1938 there was no 24/7 global economy, no well-educated and independent work force, no high-tech sector, and no equity compensation like employers deal with today,” he said.
“The time-and-a-half approach was invented to spread work around for an abundant labor force,” said Greenbaum, asserting that “the classifications seem awkward today when educated employees are on call with beepers or Blackberries.”
Lawyers explained that employers generally must provide hourly wage protections, such as meal breaks and overtime pay, for any employee who does not fit one of three FLSA exemptions: executive, professional, or administrative.
In recent years, many employers made the mistake of treating “assistant manager” positions for banks, retail stores or restaurants as executive exemptions. “Assistant managers should supervise at least two full-time employees and spend more than half their time in management – they can’t be stocking shelves all the time,” said Alaimo.
Employers also overused the professional exemption taking it well beyond licensed professionals, such as doctors and lawyers. Creative talents, such as musicians, designers and journalists, can sometimes qualify, but they have to contribute a unique interpretation or analysis and consistently exercise independent discretion.
“Employees following set formulas or using little independent discretion or judgment will not be exempt,” said Greenbaum, noting that brokers, salespeople, and clerks can also flunk another “independence” test under the administrative exemption.
“The rules for administrative exemption are particularly complicated, and the federal tests can be different from those under state law,” said Alfred, noting that it cannot be casually assigned to non-manual office workers. These individuals must also function primarily in management or business operation functions consistently with sometimes confusing regulations.
Alaimo said employers trying to settle claims in good faith have tripped over other FLSA protections as well: “An employee can’t contract away their rights and they can’t waive statutory liquidated [double] damages or willfulness [look-back period] penalties.”
King said some court decisions penalize employers who make “improper” rectifications. Those rulings facilitate the class certification of employee groups who have bargained for remedies – even groups that might not otherwise constitute a class.
On top of that, Alfred said many states have created unique rules involving specific industries, uniforms, break periods, or even banks on which paychecks must be drawn. In addition, they’ve expanded “bounty hunter” and “private attorney general” provisions that encourage plaintiff’s lawyers to monitor these rights.
But the biggest land mine for employers lies in damage calculation for misclassification. “As an economist, I would view the awards given to stockbrokers or commissioned salespeople as legal fictions,” said King. He explained that commissions, bonuses and certain other payments by employers essentially factor into the calculation of the base rate to derive the time-and-a-half rate for extra hours worked.
Beating the odds
Employers can avoid the tide of wage cases through effective audits.
“Annual audits are really essential for prevention now,” said King, who suggested thorough audits should consider all the nuances of local laws. “You must pay attention to the details – such as who must take meal and rest breaks, what constitutes adequate and prompt payment, and other issues arising under state laws.”
Alaimo agreed, adding that audits should also examine annual changes in job responsibilities and descriptions, along with changes in the FLSA.
Besides helping employers to avoid lawsuits, such audits can effectively cut off statutory liquidated damages and penalties for willful conduct by demonstrating an employer’s good faith reliance on counsel, said Greenbaum.
When conducting audits, there are several pitfalls to watch for and remedy, according to experts. “One of the biggest pitfalls is the employer’s natural desire for consistent policies among its employees in many states. But that can create problems if you overlook variations in law from state to state,” Alfred said.
Greenbaum advised, “You should also look out for the common statement, ‘We are not authorizing overtime.’” He said the FLSA requires payment for any overtime actually worked regardless of authorization. “It is a good idea to check the training of your managers, who need to know what they can and can’t do.”
Alaimo observed that “managers should also avoid deductions from paychecks for salaried workers, such as docking them for jury duty or personal time, if they expect to keep them exempt. Exempt workers are paid for the job they do and not hours worked.” Employers also have to watch for the clash of modernity with the FLSA. “Non-exempt workers calling into the office, telecommuting or working on Blackberries can create problems, and we’re going to see more challenges to this,” King predicted.
For those who are uncertain of where the boundary between black and white lies, Greenbaum suggested the possibility of having outside counsel seek an opinion from a labor commissioner based on hypothetical facts about an anonymous employer.
But the most common suggestion was that employers should spot and resolve individual grievances of all kinds quickly and effectively. “It is typical for a case to start out as a lousy wrongful termination claim, only to turn into a much more viable wage claim involving many more people,” said Albert.
“When an employee seeks a lawyer now, they will be confronted with a checklist of possible claims on age, race, sex and possible violations of the FLSA or state wage acts,” Alaimo explained, noting that the wage act claim is often most appealing.
That is why some employers are creating more hot lines or other means of finding out about workplace problems before they blow up, said King. “Employees won’t speak up unless they’re very confident management will do the right thing because they know that if you shoot at the king and miss, you are dead,” he added.
For companies faced with the prospect of going to court, recent encouraging news is cause for optimism. “In the last six months, more courts have started to cut back on the expanding view of class certifications,” said King. “[Some] have acknowledged that they never intended to set off a wave like this.”
Lawyers also noted that courts are more carefully scrutinizing the merits of “donning and doffing” cases and other recently popular attacks.
There is optimism as well concerning recent U.S. Department of Labor pronouncements that encourage some remedial activities, without taking a punitive viewpoint toward good faith efforts to resolve disputes. “But this is different from the view you still get in many courts,” Alaimo cautioned.
McWilliams also advises employers hit with a meritorious individual claim that they can avoid a class action blow-up if they to “face the music and resolve it promptly with advice of counsel.”unsel if you want to avoid a blow-up into a class action.”
Even if an employer does get hit with an action that has some merit, and it becomes a class action, that has some merit, the results need not be devastating, lawyers said.
By forcing the plaintiffs to prove the nature of their duties, the hours they worked and time spent on breaks, employers can limit exposure. Providing solid documentation for non-exempt employees, such as time sheets, and demonstrating good faith efforts to comply with FLSA classifications can also help.
“But if you do need to settle, it’s important to get the plaintiffs’ lawyer to agree that you will handle all communications about the settlement with the press and employees,” said McWilliams. She explained that “good communications with employees and the press will reduce antagonism, minimize backlash and keep the trust of your workforce.”
McWilliams stressed the importance of this because “potential claimants will often avoid opting into future suits, and the press will treat you better if they see the company is committed to doing the right thing.”
She advised employers to “communicate carefully about your mistakes and don’t communicate out of anger,” suggesting that “the long-term results are much better if the company’s image is one of reason and rationality.”
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Top 10 dangers
Plaintiffs’ lawyers are pursuing a wide array of strategies in seeking class certification for wage and hour claims.
Defense lawyers say some of the top exposures include:
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Ringing up the damages
For in-house counsel dealing with managers who think wage and hour issues are just “details” for lawyers, the following list proves otherwise, offering a glimpse at just some of the reported payouts employers have faced since 2000:
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Taming the monster
Lawyers who handle wage and hour matters say companies can significantly reduce the risk of class actions by following the steps listed below.
Conduct audits. Review the company’s written policies, job descriptions and actual practices in the workplace. Look for disparities between company policy or job descriptions and actual practices or responsibilities.
Classify correctly. Marketing and inside salespersons are often misclassified as exempt from hourly pay rules, as are assistant managers who spend more time working than managing other people. This area is tricky and requires the help of an employment law specialist.
Maintain time sheets. Employers must maintain adequate and accurate time records for hourly employees to counter allegations of abuse.
Learn the wage and hour rules. Managers need training on what they can and cannot do to hold hourly summaries/costs down. It is wise to consult employment specialists periodically to confirm and update interpretation of legal obligations.
Review policies and manuals. Make sure your policies and employment manuals comply with the law. For example, under the FLSA, you should avoid stating that your company refuses to pay overtime that is not pre-authorized by a manager.
Update policies and manuals. Remedy deficiencies immediately when discovered, and affirm the company’s ongoing commitment to compliance.
Train managers. Supervisory employees must understand enough law to know when they are stepping into a danger zone. They should be periodically schooled in changes of law that can affect your company’s bottom line.
Have a system for reporting violations. Some companies have a tip line or other means of pushing complaints up the line. Failure to act on a problem just pushes it underground where it mushrooms larger and the damages build. Meanwhile, when misconduct goes unreported, a bad manager may be promoted to a higher sphere of influence for controlling labor costs in the wrong way.
Take action and communicate it. A company that tries to cover up a problem often compounds its damages. By taking corrective action, and communicating that action, a company can reaffirm its commitment to compliance and gain support and respect from its employees.
Treat employees respectfully. Experts agree that a high percentage of wage and hour lawsuits began as complaints about other matters that weren’t rectified. When a jilted employee seeks counsel for discrimination, harassment or wrongful termination, he or she may become the lead plaintiff in a class action wage claim.