Trends in Wage and HourLitigation Over Unpaid WorkTime and the PrecautionsEmployers Should TakeLaurent Badoux, Esq.1Published for ADPby Littler Mendelson, P.C.HR. Payroll. Benefits.
The weather analogy of the “perfect storm” is well-suited to describe the current situationconfronting U.S. employers in the area of wage and hour law because of increased activity byplaintiffs’ bar; greater focus on wage and hour violations by the U.S. Department of Labor (DOL) inadministering the Fair Labor Standards Act (FLSA);2 leniency of rules governing the certification ofFLSA collective actions; and, to some extent, employers lax in auditing wage and hour compliance.This paper reviews emerging trends in wage and hour litigation and suggests some precautionsemployers may take to address these trends and minimize their potential impact.Claimants…and the Lawyers Who Want to jobs that formed the backbone of the American economy inRepresent Them the 1930s, it is now being applied to jobs that did not exist inThere is a rising tide of wage and hour litigation in the United the 20th century. The change in the form of our economy,States. In the ten years from 2001 to 2011 the number of however, is not the sole reason for the staggering increaseFLSA collective actions filed in federal court increased by of FLSA lawsuits involving multiple claimants. Indeed, muchnearly 500%. In the last year alone, FLSA collective action of this increase comes from lawyers specializing in litigatingfilings in federal court increased 16%. Moreover, our review cases with multiple claimants.of court data shows that currently 90% of all federal and statecourt employment law class actions filed in the United States In recent years, plaintiffs’ firms have employed an industry-are wage and hour class or collective actions. Damages specific approach when it comes to wage and hour litigation.in these cases are also alarming. In 2010, the average Most often, one firm successfully targets an industry andsettlement in the top 10 reported wage and hour class and is quickly followed by “me too” lawyers who seek plaintiffscollective actions was $34 million. to target other employers in that industry using “copycat” complaints. With today’s technology, potential plaintiffs can find legal representation without ever leaving their own homes. Plaintiffs’ attorneys are taking advantage of theOf all state and federal class or Internet, social media and networking sites to reach potential plaintiffs. Oftentimes, websites allow plaintiffs to “submitcollective actions filed in the a claim” from the comfort of their own couch. In addition,United States, 90% are wage plaintiffs’ firms are hiring outside companies to send email blasts to employees of target companies.and hour claims. The recent increase in wage and hour class and collective action litigation is, therefore, in no small part a function ofIn addition to the dramatic increase in wage and hour class the efforts of plaintiffs’ lawyers who are unlikely to curtailand collective actions brought by private attorneys, the their efforts in light of the success they have experiencedDepartment of Labor (DOL) also stepped up its wage and hour not only in soliciting and gathering claimants, but also ininvestigations and enforcement actions in recent years. For obtaining large attorneys’ fees in these cases. And in the2013, the Wage and Hour Division (WHD) of the DOL is seeking unlikely event plaintiffs’ lawyers lose their motivation to bringa budget increase of $6.4 million to support the addition of 57 more lawsuits, the DOL is willing to step in their shoes or isinvestigators to enforce the FLSA. This is in addition to the more actively involved in encouraging claimants to proceed withthan 300 WHD investigators hired by the DOL since 2009. There private lawsuits.has also been a significant increase in the amounts recovered The Impact of the Enforcement Agency – The New DOLby the DOL from employers. In fiscal year 2011, for instance, theDOL recovered $225 million in back wages for employees, up Strengthened in their resolve by data suggesting in excess of28% from fiscal year 2010, and the largest amount collected in 70% of employers are not in full compliance with the FLSA,a single fiscal year in WHD’s history. Secretary of Labor Hilda Solis has put the DOL on a path of more vigorous enforcement of existing laws. In one of herCongress enacted the FLSA establishing the nation’s wage first statements following her appointment in June 2009,and hour laws in 1938.3 Although the FLSA was enacted to Secretary Solis told attendees at the American Society ofaddress issues surrounding manufacturing and factory-based Safety Engineers conference, “Make no mistake, the DOLTrends in Wage and Hour Litigation Over Unpaid Work Time and the Precautions Employers Should Take 1
is back in the enforcement business.” A review of recent information about their rights in the workplace and toactions by the DOL—from policy initiatives, to pronouncement educate employees on how to seek the assistance of theon certain legal issues, to the promulgations of new Wage and Hour Division when they believe they have been theregulations—demonstrates that Secretary Solis is working to subject of a violation.fulfill that goal. On April 26, 2010, the DOL announced its spring regulatoryStarting in 2009, the DOL promulgated a number of initiatives agenda and its emphasis on “Plan/Prevent/Protect: Thereflecting a harsher stance in its dealing with employers. Beginning of a Broader Regulatory and EnforcementThese initiatives included the following intra-agency directives: Strategy.” This strategic initiative is directed not just at• More frequent imposition of liquidated damages for the Wage and Hour Division, which administers the FLSA, repeat or willful violations. but also OSHA, MSHA, OFCCP. The new initiative requires employers to “find and fix” violations. “Employers and others• A suggested prohibition on the use of the DOL’s Release in the Department’s regulated communities must understand Form (known as a WH-58) in the absence of a “full that the burden is on them to obey the law, not on the Labor investigation” conducted by the DOL, in contrast to its Department to catch them violating the law. This is the prior use to resolve a self-directed audit or a third-party heart of the Labor Department’s new strategy.” This new (lawyer/consultant) evaluation. enforcement strategy will require employers to assemble plans, create processes, and designate people charged with• Targeting “misdesignated” independent contractors both achieving compliance. 4 by industry and job classifications.• An effort to extend tolling agreements (agreements that The DOL’s first contemplated step for employer compliance preserve the period for which back pay can be claimed) (“Plan”) involves the implementation of plans “for identifying to include the period in which individual employees can and remedying risks of legal violations and other risks raise their claims, rather than limiting such agreement to workers.” The second step (“Prevent”) would require to an extension of the DOL’s right to bring claims on compliance with a proposed requirement that employers behalf of employees. thoroughly and completely implement the plan in a manner that prevents legal violations. The final element of the DOL’s• A suggestion that the DOL should no longer accept and strategic initiative is to “Protect.” What the DOL seeks in allow Voluntary Compliance Arrangements, by which this process is a specific timetable for monitoring ongoing an employer could come to the DOL and admit to past compliance and will likely require periodic self-audits. non-compliance while entering into a promise to ensure complete future compliance. The DOL has indicated that the Wage and Hour Division is developing recordkeeping regulations that it plans to publish as a “Notice of Proposed Rulemaking” in 2011 as part of the DOL’s Plan/Prevent/Protect strategy. According to theIn 2010, the average settlement strategic plan, “the FLSA recordkeeping regulations under development will require that covered employers notify eachin the top 10 reported wage and of their workers of their rights under the FLSA, and providehour class and collective actions employees with information regarding their hours worked and wage computations.”5 This will likely have the mostwas $34 million. significant impact of the Plan/Prevent/Protect initiative by broadening the DOL’s ability to monitor compliance with the FLSA. It is logical to expect, drawing a parallel with existing recordkeeping regulations, that the DOL will also imposeIn 2010, the DOL began a policy and enforcement initiative sanctions for non-compliance. Although the regulations aretargeting healthcare employers for failing to pay employees not published yet, one could foresee that an employer thatfor missed or interrupted meal periods and failure to does not adhere to the new recordkeeping regulations mayaggregate hours worked. The DOL also instructed its field be subject to such sanctions even if the employer has notoperations personnel to direct audits at past recidivists, to be violated substantive provisions of the FLSA. In a time wheremore aggressive in the use of civil money penalties for repeat the country’s economic difficulties have left many employersand willful violations, and to use the three-year back-wage with limited monetary resources, the DOL’s new initiativeperiod for repeat and willful violations. is likely to create significant additional costs. Moreover, by setting a specific model of compliance, the DOL may haveOn April 1, 2010, the DOL launched a national public also defined the default expectations for employers. Inawareness campaign called “We Can Help.” This public other words, even though not fully implemented at this time,awareness effort is intended to provide workers withTrends in Wage and Hour Litigation Over Unpaid Work Time and the Precautions Employers Should Take 2
plaintiffs’ attorneys may seek to use the Plan/Prevent/Protect There are five main subsets in which we found specific trendsinitiative in employment litigation as a measure of employer for unpaid work time litigation:compliance efforts. (1) auto deductions for meal periods;On May 9, 2011, the DOL unveiled its latest effort to (2) rounding;raise awareness of wage and hour issues for employees (3) remote work;launching its first smartphone application, an electronic (4) off-the-clock work; andtimesheet that employees are encouraged to use to tracktheir hours of work, including breaks. According to the (5) regular rate issues.DOL, the information tracked through this application“could prove invaluable during a Wage and Hour Division 1. Auto Deductions for Meal Periodsinvestigation when an employer has failed to maintain We reviewed 23 published opinions in wage and hour classaccurate employment records.” This application has the or collective action lawsuits arising during a period spanningpotential to be not only a source of support for litigation as from 2005 to 2010 involving challenges to meal period autothe DOL suggests, but also a source of antagonism between deduction policies. These cases involve claims that time foremployees and employers over such issues as rounding, meal breaks was automatically deducted from employees’pre-shift and post-shift activities and travel time, to name pay even when an employee worked through all or part ofa few situations in which compensability itself may be an the meal break period. Conditional certification was grantedissue. The DOL also indicated that it expects to launch in whole or in part in 18 of these cases. Of course there areadditional applications that will help employees track their many more unpublished decisions in this area, but the facttips, commissions, bonuses, deductions, holiday pay, pay for that conditional certification was granted in a great majorityweekends, shift differentials and pay for regular days of rest, of published decisions underscores the litigation risks andamong other pay information. costs in these types of claims. As an example that further emphasizes the risks of such claims, UPS entered into an $87 million class action settlement with 20,000 drivers whoData suggests in excess of 70% claimed UPS automatically deducted standard meal periods from wages.6 Of course, the size of the class and number ofof employers are not in full hours worked were factors in the size of this settlement, but the lesson remains valid for large and small employers alike.compliance with the FLSA. Although automatic meal deductions are not per se unlawful, as long as employees either always take a meal break orThus, it appears that the DOL’s new strategy is not only to record time worked during meal periods, the practice isimprove awareness of wage and hour laws for employers fraught with monitoring difficulties that make it risky in theand employees, but also to actively support private litigation current litigation climate. Thus, employers may considerby creating employee expectations that may not always be eliminating automatic meal period deductions and insteadaccurate given the complexity of many wage and hour issues. focus on enforcement of other policies, such as prohibitingThe DOL’s new emphasis on compliance and enforcement employees from eating lunch at their workstations. On thestrongly suggests that employers should actively assess other end, employers who have invested in an automatedwage and hour compliance and implement policies and timekeeping solution may be able to implement specificrecordkeeping software to address any issues. policies to address the most common problems arising from auto-deduct policies, without sacrificing the labor costRecent Trends in Collective Action for Unpaid Time benefits of such a policy.7Two main claims in wage and hour litigation are unpaidwork time and misclassification. The former claim involves 2. Rounding – A New Focusassertions that the employer did not account for all of the Fundamentally, one must view the DOL’s rounding regulationtime worked by an employee, and therefore the employee’s in its proper context. Historically, when dozens of individualspay either dropped below minimum wage or overtime was not waited in line to manually clock in and their time waspaid, or both. The latter focuses on whether employees are accounted for manually by payroll clerks, allowing anincorrectly considered exempt and therefore denied overtime “insubstantial or insignificant period” to be rounded off forpremium compensation for hours worked over 40 in a work accounting ease made sense. In an age where ultra-preciseweek. The nature of these claims are different, and this electronic time-recording software is widely available, thepaper focuses exclusively on the trends arising in the area of practical reasons behind the old DOL’s enforcement policyunpaid work time claims and the practical steps employers have almost completely eroded. As a result, it has becomecan take to minimize their exposure to such claims.Trends in Wage and Hour Litigation Over Unpaid Work Time and the Precautions Employers Should Take 3
much easier for plaintiffs’ attorneys to argue that the true these types of situations can be significant and unexpected.reason for rounding is more to save employers money from For instance Sears Roebuck entered into a $15 millionworkers’ pay than to save them from accounting aggravation. settlement for failing to properly pay employees who began their workday at home by checking computers.Over the last two and a half years, at least 35 reporteddecisions or settlements in federal district courts involved 4. Off-the-Clock Workallegations of improper rounding. In those cases where Off-the-clock work occurs whenever an employee performscourts certified class or collective actions, they often relied work while on work premises, but not clocked in, whetherupon a common rounding policy or procedure applicable to before or after shifts or during meal periods. The amountthe entire group of claimants. The risks involved in rounding of unpaid time, and by extension the monetary liability, intend to increase with the number of claimants. For instance, off-the-clock situations can reach significant levels especiallythe largest settlement that we identified in a case that if employees fall into the habits that create off-the-clockincluded rounding allegations was $19 million for a purported issues, such as arriving early, skipping lunch or staying ongroup of 13,000 employees. It is harder to value rounding past the end of the shift. The risk is exacerbated if frontlinecases because such cases often include other allegations, supervisors create the impression that “going above andmaking it difficult to segregate the value of such claims from beyond” in service to the business and its customers meansthe value of the other claims in awards and settlements. working longer as opposed to working harder or more efficiently. In one of the matters we reviewed for this paper,Like automatic deductions for meal breaks, the practice a major grocery store chain entered into a $53.3 millionof rounding is lawful. The DOL accepts rounding if the settlement for alleged off-the-clock work. Although itarrangement devised by the employer averages out so can be a source of significant liability, off-the-clock workemployees are “fully compensated for all the time they have can be averted mostly through implementation and strictactually worked.”8 The problem with rounding is that the net enforcement of a clear, written timekeeping policy thateffect may be that the employee’s time is always rounded down, includes the following:but never rounded up. Regardless of whether the employer orthe employee is the more frequent beneficiary of the rounding • Requiring employees to accurately record all work timepolicy, the litigation risk is that even a few employees negatively and submit completed, signed time records in a timelyimpacted by the policy can turn a personal gripe into a costly manner.“conditionally certified” collective action. • Strictly prohibiting off-the-clock work. • Prohibiting managers from requesting/requiring off-the- clock work or suggesting it is acceptable.The FLSA recordkeeping • Mandatory process for reviewing exceptions orregulations will likely have the modifications to time entries to identify reasons why frontline supervisors modify time entries of subordinatesmost significant impact of the and ensure frontline supervisors do not erase any legitimate work time.Plan/Prevent/Protect initiative by • Mandatory reporting of all suspected off-the-clock workbroadening the DOL’s ability to so it can be investigated and corrected.monitor compliance with the FLSA. • Availability of an internal mechanism for hourly employees to complain about uncompensated work. • Prohibiting employees from arriving at their work station3. Remote Work before set start time.The concept of “remote work” involves various circumstances • Automatic discipline of employees who violate thein which an employee is able to perform work outside of timekeeping policy.visual observation from a supervisor or active monitoring bythe employer. Examples of remote work include remotelylogging on to a computer system or accessing companyemails on a BlackBerry, driving for work-related purposes,reviewing files or materials or taking phone calls at home.Many employers struggle with how to account for andcompensate employees for such time, if at all. Risks forTrends in Wage and Hour Litigation Over Unpaid Work Time and the Precautions Employers Should Take 4
One of the most difficult issues in off-the-clock work involves timekeeping and payroll processes they use in calculatingpre- and post-shift activities (referred to in DOL parlance incentive compensation.as preliminary and postliminary activities under the Portal-to-Portal Act of 1947 amendment to the FLSA),9 which Identifying and Attacking Problems Throughinvolve numerous tasks that may have to be performed Timekeeping Practicesin conjunction with the work required. Examples of such Employers can minimize the risks associated with every oneactivities include: putting on and taking off specialized of the litigation trend areas identified above by adopting theclothing or gear (referred to as “donning and doffing” in following practices:DOL regulations), and booting up a computer or loggingon to a network. Whether such tasks are compensable • Train employees and managers regarding hours workedcan be complex and often require legal analysis. Activities and reinforce that training over time;performed before or after the regular work shift, on or off • Promulgate clear timekeeping policies;the production line, generally are compensable under theFLSA if those activities are an integral and indispensable • Adopt accurate timekeeping software with the ability topart of the principal job activities.10 Not every activity that is generate reports suitable for periodic auditing;indispensable, such as the requirement to wear a uniform, is • Devise a reporting and audit protocol to monitor hoursinherently integral to the job.11 worked reports;5. Failure to Properly Calculate the “Regular Rate” • Provide an internal mechanism for managers andIn addition to ensuring that time is recorded correctly, employees to report suspected timekeeping or payemployers are also required to calculate employee inaccuracies; andcompensation correctly under the FLSA. Another litigation • Require employees to certify that their time records andtrend involves errors in factoring the value of bonuses and paychecks accurately reflect time worked and pay due.commissions for hourly employees who work overtime.Overtime is calculated at a 50% premium rate from theregular rate of pay for hours worked over 40. The regularrate of pay includes not only the hourly wage paid to anemployee, but in most cases also includes other forms The DOL’s new emphasis onof non-discretionary compensation such as bonuses,incentive pay, commissions, shift differentials or retroactive compliance and enforcementpay increases.12 strongly suggests that employersNon-discretionary bonuses and commissions can beproblematic because they generally must be apportioned should actively assess wage andback over the period in which they were earned.13 Thisrequires retroactively calculating the regular rate of pay for hour compliance and implementevery work week in which overtime was paid to ensure theaccuracy of the regular rate of pay upon which the overtime policies and recordkeepingrate was calculated. To avoid such calculations, employerscan use a bonus or commission structure that is paid out as software to address any issues.a percentage of total compensation. Because a percentagebonus of this type inherently accounts for overtime pay Adopting these practices can help employers stay ahead ofreceived, no recalculation is necessary.14 Advances in the the litigation trends by identifying potential problems throughquality of integrated record-keeping and payroll software one of three means: (1) employee complaint; (2) manageravailable to most employers are also an attractive option. report; or (3) audit result. Many of the “red flags” that mayFirst, percentage bonuses, which are often less precise in suggest the existence of a time-reporting issue depend oncreating compensation incentives, become less necessary visual observation. They include seeing employees takewhen an employer adopts an integrated system that can files or work home, working during meal periods or eatingeasily handle bonus recalculations without requiring at their work stations, and arriving early. Auditing becomesmanual work from payroll personnel. Second, it is difficult particularly important for employers to root out bad habitsfor an employer to argue that errors in manual calculations or complacency that could result in less than full complianceare excusable when accurate integrated software is with written policies. Knowing that auditing and possibleavailable. Thus, because of the implications they may discipline is inevitable will lead most employees and frontlinehave, it is important for employers to carefully consider the supervisors to be more mindful of timekeeping policies.Trends in Wage and Hour Litigation Over Unpaid Work Time and the Precautions Employers Should Take 5