Why Employers (and Employees) Need to Pay Attention to the Fair Labor Standards Act

Recently, General Counsel, P.C. is getting more (and more) calls for a business litigation attorney regarding alleged violations of the Fair Labor Standards Act (“FLSA”).  And, more often than not, the employer is in violation of the FLSA and subject to potential liability (to one or more employees).  Provided below is a quick overview from a business litigation attorney of the FLSA; a discussion of Why Employers Need to Ensure Compliance; and Top Four FLSA Liability Pitfalls.

FLSA (Brief) Overview

In other articles our business litigation attorney will discuss, in more detail, specific components of the FLSA.  But, as a general matter, the FLSA establishes minimum wage, overtime pay, record keeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments. Covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009. Further, overtime pay at a rate not less than one and one-half times the regular rate of pay is required after an employee exceeds 40 hours of work in a workweek. The FLSA also provides that certain classifications of employees (executive, administrative, professional, outside sales or computer employees) are exempt from overtime requirements.  Finally, the FLSA provides numerous intricate rules for different industries that are beyond the scope of this introduction.  For additional information, contact a business litigation attorney for guidance on pursuing full FLSA compliance.

Why Employers Need to Ensure Compliance

Employers need to ensure compliance with the FLSA because if they don’t, it can be very expensive.  Based on the experience of past cases, any  business litigation attorney in our firm will tell you that this liability is not only for the company, but company owners and officials can be held personally liable in certain situations.

First, our business litigation attorney will warn you that FLSA cases can be very expensive for a variety of factors:

(a) rarely does a case involve just one employee;

(b) FLSA violations generally extend over a period of time;

(c) unpaid overtime can add up very quickly;

(d) employees are generally owed not only unpaid wages in FLSA litigation, but also liquidated damages which equals the amount of unpaid wages – so, in other words, employees receive twice what they were owed;

(e) punitive damages can be awarded at the discretion of the court; and

(f) employers generally are required to reimburse employees for legal fees and costs that they incur bringing the FLSA lawsuit.

Second, business owners and/or managers can be personally liable for FLSA damages. This is why it is good to have a business litigation attorney and be familiar with the FLSA. Generally speaking, the FLSA broadly defines an “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee.”  Such individuals may be liable under the FLSA if they exercise significant control over the company’s operations. To make this determination, courts consider whether the managers have the power to hire and fire employees, the power to determine salaries, the responsibility to maintain employment records and other signs of operational control over significant aspects of the corporation’s day-today functions. Furthermore, a supervisor found personally liable for a violation of the FMLA is liable to the same extent as is the employer.

Business Litigation Attorney: The Top Four FLSA Liability Pitfalls You Should Know About

1. Incorrect Classification of Employees as Exempt: The most common mistake made by employers is believing that because they pay an employee a salary, they are automatically an exempt employees.  It does not!  Employers should start with the proposition that all employees are entitled to overtime pay.  If, and only if, the employee satisfies one of the tests for exemption should the employer categorize the employee as exempt from overtime.
2. Failure to Pay Employees for All Time Worked: The FLSA requires that all non-exempt employees be paid for all time that they are “suffered or permitted” to work.”  When an employee is completely relieved of all work related duties (such as during a lunch break), the employee is not entitled to pay.  This appears straight-forward, but employers can incur tremendous liability for mistakes.  For example, if an employee sits at his/her desk during lunch and although is reading a personal book, they also answer the telephone once or twice (even if only voluntarily), that could be considering “working time” entitling the employee to pay.  Or, if the employee is required to get to work every morning to make sure a truck is fueled before the work day starts – the time spent fueling truck is “working time.”
3. Misclassifying Employees as Independent Contractors: Far too often, employers misclassify someone who should be a W-2 Employee as a 1099 Independent Contractor.  To determine whether someone is an employee or independent contractor, evidence of control and independence are considered.
   The IRS Three Factor Test considers:
   (a) Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?;
   (b) Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.); and
   (c) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?  If someone is misclassified as an independent contractor, the employer can be liable for all wages (and overtime and other FLSA damages) the individual should have received (and taxes owed to state and federal government).
4. Making Improper Deductions from Exempt Employees Pay: The FLSA has very specific rules on when deductions can be made from exempt employees’ pay.
   Deductions from pay are permissible when an exempt employee:
   (a) is absent from work for one or more full days for personal reasons other than sickness or disability; (b) 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;
   (c) to offset amounts employees receive as jury or witness fees, or for military pay; (d) for penalties imposed in good faith for infractions of safety rules of major significance; or (e) for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions.  

If improper deductions are made, the exemption can be lost and the employee would be entitled to overtime compensation.

The FLSA is a landmine of potential liability for employers especially if you are not guided by an experienced business litigation attorney.  If not recently done, an employer should conduct a workplace FLSA audit to ensure compliance. For additional information on employment law issues, please do not hesitate to contact our business litigation attorney, Merritt Green, Chair of General Counsel, P.C.’s Employment Practice at mgreen@gcpc.com 703-556-6505.