Bookmark and Share

Legal Updates

The Wage And Hour Audit: Do It Now, Or Pay Later

Now is the time for a wage and hour audit.  It is the great idea that everyone seems to agree is a great idea, but that almost no company actually does.  Unfortunately, however, procrastination is becoming increasingly risky:  the U.S. Department of Labor has recently promised greater enforcement activity; wage and hour claims are increasing significantly; and recent settlements, fines and damages awards are costing companies (and their executives) millions upon millions of dollars.

On September 2, 2009, Labor Secretary Hilda L. Solis said, “Beginning this year and into 2010, I am hiring an additional 250 new wage and hour investigators so we can continue to effectively monitor wage and hour violations.”  True to her word, the U.S. Department of Labor has been hiring additional investigators.  As she has made clear, “strong enforcement remains at the top of [her] agenda.”

So, companies that have not recently done a wage and hour audit – covering issues from job classifications to overtime, from meal breaks to tip pooling, from donning & doffing to payroll records – need to do it now.

And they should protect the confidentiality of the audit to the greatest extent possible, pursuant to the attorney-client privilege, by having experienced counsel involved. 

Wage & Hour Audit, Part I:  Overtime

The wage and hour audit should address a long list of issues under federal and state law, including the requirement to pay overtime in accordance with federal law and the laws of each state in which the company has employees.  This raises myriad issues, most of which are described in the full article – along with a brief summary recent cases, which shows that the risks of getting it wrong are both real and significant.  (For more detail on these issues, and the recent fines, settlements and damages awards that have resulted, please see the complete article or White Paper.)

1.      Misclassified As Exempt

$22.75 Million.  In August 2009, Cintas Corp. agreed to pay $22.75 million to delivery drivers nationwide, after allegedly misclassifying them as exempt and failing to pay overtime.

2.     Misclassified As An Independent Contractor

$3.5 million And Four Days In Jail.  In August 2009, a California residential cleaning service company was ordered to pay $3.5 million in back pay, liquidated damages and fines, for improperly classifying 385 of its workers as independent contractors.  Further, in October 2009, after failing to comply with the court’s order to pay damages, the owners of the company were jailed for four days.

 3.    Exemptions Lost Due To Improper Deductions

$25 Million.  In August 2008, a grocery store was found liable for $25 million in back pay (for overtime) after it improperly docked the salaries of approximately 400 managers for hours not worked during the workweek, and therefore lost the exemption. 

 4.    Failure To Pay OT

$4 Million.  In January 2009, several television networks (including Fox Broadcasting, American Broadcasting Company Inc. and CBS Broadcasting) and producers agreed to pay $4 million total to settle claims that they failed to pay overtime and provide required break periods.

5.     Joint Employer OT

$2.7 Million.  In July 2009, Partners Healthcare agreed to pay $2.7 million in back pay for overtime to 700 employees who were working for more than one Partners-affiliated hospital during the same week.  Partners brought the issue to the attention of the DOL after recognizing that it may have violated the FLSA. 

6.     Miscalculation Of Regular Rate Of Pay

$562,901.  In October 2009, the DOL recovered $562,901 in back wages, for 1,411 construction workers, from an employer that failed to include the value of retention and daily bonuses in the regular rate for overtime purposes.

The Wage And Hour Audit, Part II: State Law “Traps”

While overtime is perhaps the most significant wage and hour problem area, it is by no means the only one.  In fact, there are numerous other trouble spots, most of which arise under state law – and which (maddeningly for employers) can vary dramatically from one state to the next.  And as the cases show, failure to comply with these miscellaneous wage and hour laws (from meal breaks to tip pooling) can be costly – to both the employer and its senior officers.  The state law traps listed below is not an exhaustive list – just a list of the traps that have caught some large damages awards in the past few months.

1.      Meal Breaks

$54 Million.  In June 2009, Wal-Mart agreed to pay up to $54.25 million for allegedly failing to provide breaks, maintain proper work records, pay for employee breaks, and pay for training for thousands of workers in Minnesota.

2.     Off-The-Clock (Donning / Doffing)

$5.1 Million.  In January 2009, Nestle Prepared Foods Co. paid $5.1 million in back wages to more than 6,000 employees for failing to pay for time spent donning and doffing required equipment and clothing.  The company subsequently identified additional back wages due to employees in Kentucky, Ohio and South Carolina.

3.     Tip Pooling

$2.5 Million.  In February 2009, hundreds of wait staff at three New York City restaurants requested the court’s approval of a $2.5 million settlement of claims that they were unlawfully required to share tips with management and sushi chefs (in violation of FLSA and state law).  One third of the settlement ($833,333) is designated for attorneys’ fees.

4.     Record Keeping Violations

$90,000.  In August, 2009, American East Painting, Inc. and its president were cited and fined $90,000 by the Massachusetts Attorney General for record keeping violations and failure to pay wages as required by Massachusetts law.

5.     Failure to Pay In Timely Manner

$410,000.  In May 2009, the Massachusetts Attorney General cited MicroLogic, Inc. and its president for failing to pay employees in a timely manner.  The citation included approximately $378,000 in back pay to seven employees, and $31,000 in fines.

6.     Frequency of Payments

$35,000.  In September, 2009, Delta Airlines was fined $35,000 for paying its hourly, non-exempt employees on a semi-monthly, rather than bi-weekly basis.  (There was no allegation that its employees had not been paid; only that payment was delayed.)

7.     Vacation Pay

$11 Million.  In October 2009, Kelly Services Inc. agreed to pay $11 million to settle claims that it failed to pay vacation (the company allegedly had an unlawful “use it or lose it” policy under Illinois law), and gave employees improper (vague) pay stubs.  $3.3 million of the $11 million was reserved for attorneys’ fees.

8.     Final Pay

$62,649.46.  In January 2009, Iris Media Group LLC, the CEO and the “company manager” reached agreement with the Massachusetts Attorney General’s Office to pay over $62,000 in back pay to 39 employees who were terminated without receiving their final paycheck.

9.     Child Labor Laws

$40,000.  In June 2009, Boston Sports Club paid a $40,000 fine to the Massachusetts Attorney General for allowing minors to work before and after permissible hours; allowing minors to work in excess of the maximum daily and weekly hours permissible; and employing minors without the required work permits.

10.  Sunday/Holiday Pay

$90,000.  In June 2009, GOL Foods, Inc. and its president reached an agreement with the Massachusetts Attorney General to pay $90,000 in back pay and fines for failing to pay 30 employees overtime, Sunday pay and holiday pay.

Next Steps:  The To Do List

Hopefully, the need and value of conducting a wage and hour audit is self-evident.  The odds are increasing that every company will be the target of some kind of wage and hour claim.  And it seems clear that the back pay, fines, penalties, and attorneys’ fees incurred in resolving those claims will be far greater than the cost of a properly conducted audit.

For companies that are serious about auditing their wage and hour practices, here are the steps to take:

  1. Give audit responsibility to the appropriate person for the company – the VP of Human Resources, the General Counsel, or perhaps outside counsel.
  2. Be sure experienced counsel is involved, (a) to help navigate the nuances of applicable wage and hour laws, and (b) to protect the audit under the attorney-client privilege.
  3. Assemble and (if necessary) train the Audit Team (which may include paralegals, junior attorneys, and/or Human Resources professionals).
  4. Have the Audit Team work methodically through the relevant wage and hour issues, including those listed in Parts A and B of this article, above:

(a)  Counsel will need to provide guidance on the relevant legal issues, under federal and applicable state laws, depending upon the nature of the workforce and compensation practices.

(b)  The Human Resources and Payroll Departments will need to provide the Audit Team with documents and information ranging from job descriptions to payroll records.

(c)  Managers throughout the company may need to be available to clarify relevant facts, such as job duties actually performed, or practices actually followed (as opposed to duties in the job description that are not performed, or written policies that are not followed).

(d) Collect and review policies, handbooks, and job descriptions.

  1. After the fact-gathering is complete, the Audit Team should report to the General Counsel’s office regarding its preliminary findings, and map out plans for follow-up investigations and addressing any problem areas.
  2. Generally speaking, a thorough audit will turn up non-compliant practices, and generally non-compliant practices should be remedied as soon as possible.  But there are often several options available for doing so.  Therefore, before any remedy is implemented, the company should consult with experienced counsel to determine the most appropriate remedy under the circumstances.
  3. When correcting problem areas, be sure to revise policies, the employee handbook and job descriptions, as necessary.

One last reminder:  be sure to protect the audit under the attorney-client privilege to the greatest extent possible.  Don’t allow the hard work of identifying and fixing any errors to become someone else’s road map to treble damages and attorneys’ fees.