Wage and hour lawsuits have become extremely prevalent over the last several years, a trend fueled by a large number of workers displaced following the financial crisis and strengthened by increased regulatory activity, successful settlements and court rulings.
This trend is unlikely to end anytime soon, according to Mike Kosednar, assistant vice president and product manager for management and professional liability insurance at The Hartford.
“Any business with employees has potential wage and hour issues,” said Kosednar. “They are among the most common and potentially damaging employment liability risks for employers today.” He noted the U.S. Department of Labor’s recovery of nearly $250 million in back wages for employees during its most recent fiscal year, which ended September 30, 2013.
In wage and hour litigation, allegations by current and/or former employees typically involve unpaid work (including unpaid overtime), failure to provide meals and/or rest breaks, or off-the-clock work. Cases may be brought under state law or under the Fair Labor Standards Act (FLSA), and may result in civil settlements or verdicts, as well as in back wages and penalties levied by the DOL.
According to data from the Federal Judicial Center, 8126 FLSA cases were filed in 2014, up nearly 5 percent from 2013.
“These numbers would be even higher if lawsuits filed in state courts under state pay practices, data which isn’t readily available, were added,” said Richard Alfred, chair of the wage and hour litigation practice at Seyfarth Shaw LLP, a national employment law firm.
“The increased focus on enforcement and the potential for costly litigation and large damage awards underscores the need for employers to take proactive steps to reduce their risk,” said Kosednar.
Risks for Manufacturers
While wage and hour claims cut across all industry sectors, manufacturers are frequent targets of private litigation, said Kosednar.
“Manufacturers are particularly vulnerable to wage and hour claims because they often employ hourly employees, and as a result, calculations for hours worked and overtime pay can be more complex than employers often realize,” said Kosednar.
Employers may not be aware that it may not be legal to deduct cash or payment for other items, such as merchandise shortages, employer-required uniforms or tools of the trade, from an employee’s wages if doing so reduces the employee’s wages below the FLSA-required minimum rate or reduces the amount of overtime pay due under the FLSA.
Also, noted Kosednar, if a manufacturer requires its employees to wear special clothing or gear, it may need to pay its employees for time spent changing into or out of that clothing or gear, commonly referred to as “donning and doffing.”
While a recent U.S. Supreme Court decision (Sandifer v. United States Steel Corp., No. 12-417) sided with employers on this matter, “it is important for employers to be consistent in their practices related to payment or non-payment for these activities,” Kosednar said.
Potential for costly litigation
Strong enforcement of federal wage and hour laws, the potential for class action status and large damage awards have made wage and hour violations an attractive target for litigation.
According to a 2013 report by NERA Economic Consulting, wage and hour settlements for U.S. companies totaled $467 million in 2012, consistent with prior years. Companies paid $4.8 million on average in order to resolve a case in 2012.
“Plaintiffs attorneys have taken notice of the size of the fees awarded by the court, which often exceed any actual back-pay for plaintiffs, and are actively client shopping,” said Kosednar.
Since allegations are directed at an employer’s payroll and timekeeping practices, lawsuits involving wage and hour claims can very easily evolve into multiple-claimant cases.
“Employers can expect a resourceful attorney to get the names of anyone else who may have worked for their company who may also be due compensation,” Kosednar said.
Best practices for employers
Given the potential for litigation and high damage awards, employers should engage qualified legal counsel in determining how best to comply with FLSA rules, said Kosednar. He offers several best practices for employers to reduce their risk of wage and hour claims:
- Track and document hours worked -- Effective technology exists for time-keeping and related processes, notes Kosednar. “The main reasons employers do not use these tools range from budget considerations to ‘we’ve always done it this way and never had a problem.’ Neither is a good idea.”
- Regularly review classification decisions regarding “exempt” vs. “non-exempt” status. Older standards no longer apply, and experts recommend an annual review.
- Adopt consistent practices for payment or non-payment for “donning and doffing” activities.
- Tap carrier resources – It is worth taking advantage of risk management resources offered by some employment practices liability insurers, which may include helplines, websites, tools and a few hours of free legal advice.
While insurance typically does not cover back pay awarded for wage and hour violations, coverage for defense costs is usually available as part of an Employment Practices Liability Insurance (EPLI) policy.
According to Kosednar, wage and hour disputes are just one example of the various types of employment related exposures employers face today. Allegations of discrimination, wrongful termination and retaliation are all at record levels.
“EPLI is a critical coverage for any business with employees,” said Kosednar. “Insurance agents, brokers and carriers play a key role in helping employers assess their exposures and design an appropriate insurance program.”
The information provided in these materials is intended to be general and advisory in nature. It shall not be considered legal advice.