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PayMaster Monthly Reporter for May 2007

Article | FLSA Exposure

FLSA Exposure: Pitfalls to Avoid – Tips to Follow
Steven L. Schwarzberg, managing partner, Schwarzberg Spector Duke & Rogers, West Palm Beach and Jupiter

There are tremendous pitfalls and misconceptions about the Fair Labor Standards Act (FLSA). It’s also a moving target, making it hard for businesses to keep up. Nationally, FLSA claims represent the greatest litigation threat against employers. South Florida is the nation’s hotbed of wage-and-hour litigation and the feeding frenzy shows no signs of letting up. Few businesses have taken proactive steps to avoid liability and they are ill prepared to handle those claims effectively.

The Perfect Storm

Let’s look at what’s causing the situation – what I call the “perfect storm” conditions:

• Statutory attorneys fees are awardable under the FLSA for successful plaintiff/employee but not for a successful defendant/employer.



• Either the aggrieved employee or the Department of Labor (DOL) can bring an action under FLSA.



• Widespread ignorance exists among employers of these often confusing regulations.



• Evolving conditions in the workplace make compliance problematic – telecommuters, working at home and autonomous employees.



• Few businesses actively and conscientiously monitor ongoing compliance. Is there a FLSA compliance officer in your organization?



• Presumptive damages are available for the successful plaintiff/employee; the burden is on the employer to show good faith. That means the employer must keep accurate time records. And if an employee is misclassified as exempt, it becomes difficult to disprove the employee’s overtime estimates, which may be substantial.



• The threat of a DOL investigation looms over every claim. Nobody wants to receive a subpoena and have the DOL stepping in to examine records.



• Owners and managers can have individual liability when they act in the interest of an employer.



• Retaliation claims may be filed if adverse action is taken after a FLSA claim is made.



• A claim may also reduce morale and productivity, and possibly generate negative publicity.



• FLSA claims are generally excluded from any protections under employment practices liability insurance (EPLI).



• In many cases, an employer relies on FLSA’s professional, executive and administrative exemptions – overtime does not need to be paid to an exempt employee. But it is not always clear whether these exemptions apply in a given situation. It’s necessary to examine the specific duties performed by the employee on a case-by-case basis to determine whether the exemption applies.

For all these reasons, substantial incentives may exist for employers to pay premium amounts to settle lawsuits early on before greater liability is uncovered, business operations are disrupted, and the very economic viability of the business is jeopardized.


Avoiding the pitfalls

There is no question that the best way to reduce exposure to wage and hour claims is to avoid the FLSA pitfalls in the first place. Here are some of the pitfalls to avoid:

• Mischaracterizing an employee as exempt. An employee’s duties may change; it is up to the employer to monitor those tasks.



• Be sure to include all compensation received by employees in the form of bonuses, shift differentials, incentives and the like to avoid miscalculation of the regular rate and the amount of overtime that should be paid.



• Avoid making improper deductions from paychecks, especially an employee’s final paycheck, to avoid a claim that the full amount of overtime wasn’t paid.



• Don’t dock exempt employees’ salaries or paid time off (PTO) leave balances, except in very limited and defined circumstances.



• After a hurricane or other disaster, be sure to pay nonexempt employees for time actually worked and pay exempt employees their complete salaries if they perform any work in that workweek. If your employees are ready, able and willing to work, you have to pay them.



• Remember to follow the minimum wage laws; be sure you’re paying overtime at the right rate.



• If you have exempt outside salespeople who are paid on commission, don’t bring them in-house for a long period. That could jeopardize their exemption.



• Don’t jeopardize exemptions by paying bonuses to exempt employees based on “extra time spent.” Instead, base bonuses on achieving performance goals.



• Don’t assume that paying employees a “salary” makes them exempt – it’s the job duties that matter.



• Don’t assume that hiring “contract labor” during the “season” or simply classifying workers as “independent contractors” means you don’t have to pay them overtime. Again, the law looks to substance over form – not the other way round.



• Try to avoid allowing non-exempt employees to eat at their workstations. Otherwise a fired employee can say, “They made me work through lunch every day.” That can create a real potential problem.



• Don’t make reductions to the recorded time of employees without their written consent.



• Have exempt employees complete annual self-evaluations in which they detail the important functions they perform.



• Don’t allow non-exempt employees to “volunteer” to work off the clock. An employee cannot waive the right to overtime.



• Include all chargeable time as “hours worked,” such as being on call, training time or travel during the workday.



• When preparing separation agreements, include a provision that the employee acknowledges that all overtime has been paid.



• Implement a document retention program in compliance with the Code of Federal Regulations (CFR), including electronic records.



• Establish an employee overtime hot line to address employee’s claims prior to litigation and to make it clear to managers that they will be disciplined for committing improper FLSA violations.



• Even if an employee doesn’t follow the rule – “prior required written authorization to work overtime” – the employer must still pay overtime. The best practice is to pay the employee and discipline the employee if the pattern continues.

Compliance is the best strategy for protecting your organization. Establish a clear policy mandating strict compliance with all FLSA regulations and train your managers and employees. You should also conduct a compliance audit to ensure all employees are classified properly. If you have a good policy in place, along with regular audits and training, you have a chance to present a “good faith” defense to a lawsuit, which will help you in court and may reduce the potential damages.

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