Worker lawsuit a new threat to employers in wage and hour claims

The August 2012 Construction Advisor (" Piece Work and the Fair Labor Standards Act ") discussed the financial risks of paying wage-earning employees on a "piece rate" basis (i.e., for measurable work completed). While this practice is not uncommon in the construction industry, as it can motivate employees to increase their productivity, it carries a high risk of claims for unpaid overtime and failure to pay minimum wage. The problem, which carries grave consequences, stems from "misclassification" of employees – i.e., employers in the construction and other industries misclassifying their workers as "exempt" (i.e., paid a salary instead of an hourly wage, to avoid overtime) or as independent contractors (to avoid overtime and payroll taxes).

In an effort to force employers to comply with wage-and-hour requirements and to punish employers that do not, the U.S. Department of Labor's Wage & Hour Division has stepped up its enforcement activity regarding suspected minimum wage and overtime violations, publicly targeting certain sectors of the construction industry.

New Threat: Employee Lawsuits. As though the consequences imposed by the government – including business and personal liability for unpaid wages and payroll taxes, tax liens and other non-dischargeable obligations – were not sufficiently severe, a new threat has recently emerged: private lawsuits. We are seeing advertisements by consumer law firms encouraging people to sue their current or former employers for alleged violations of the Fair Labor Standards Act (FLSA). The suits are generally filed in federal court, and they pose a serious threat to businesses and their owners and managers.

If an employee wins an FLSA-based lawsuit against your company, you and the company may be on the hook for:

• unpaid compensation;

• liquidated damages equal to the unpaid compensation (you read that correctly – if you owe a worker $2,000 in unpaid compensation, you may owe him another $2,000 in damages);

• attorneys' fees and other costs incurred in bringing the lawsuit; and

• pre- and post-judgment interest on damages, including potential statutory penalties.
  

Employer exposure is not limited to overtime and minimum wage deficiencies. Claims can also stem from alleged non-payment for work performed, a nebulous charge that employers bear the burden to refute. Common employer responses – "I didn't know they were working" or "they weren't given authorization to work" – while perhaps true, offer little protection (potential defenses are discussed at the end of this article).

On employers' obligations, the FLSA is clear:

• Employers must compensate employees for all work that employers permit employees to perform. (29 C.F.R. § 785.11)

• It is the responsibility of employers' management to ensure that work is not performed if not desired. (29 C.F.R. § 785.13)

• Employers cannot accept the benefits of employees performing work without compensating employees for their work. (29 C.F.R. § 785.13)
  

While not every employer is subject to the FLSA's requirements, the exceptions are few. You are governed by the FLSA if you are "engaged in commerce" (you can probably stop right there) "or in the production of goods for commerce" or are "engaged in related activities performed through unified operation or common control for a common business purpose."

You must record all of the time employees work, classify employees accurately as to whether they are "exempt," and pay hourly workers overtime wages for all hours worked in excess of 40 hours per week (except for certain conditions). If your records of employees, wages, hours and other conditions and practices of employment are not maintained per federal requirements, they not only provide little in the way of a defense; they may also provide the evidence that allows the employee to prevail in the lawsuit.

If employees are able to demonstrate a pattern of willful and intentional behavior on your part, and your lack of a good faith effort to comply with the FLSA, they have three years within which to sue you and your company. Also, if you discriminate against employees by, for example, threatening retaliation to force employees to work more than 40 hours per week without overtime pay, you expose yourself to a violation of Arizona's " Constructive Discharge Statute " (A.R.S. § 23-1502).

Your liability does not stop with acknowledged employees. If you paid workers as "independent contractors," they may claim that you should have paid them wages (with overtime) and withheld and paid over federal and state taxes. In that case, you are liable not just for overtime and the taxes associated with it, but also the unpaid taxes on the amounts that you did pay them.

Personal liability for unpaid wages and associated liabilities is not limited to the company's owners. Accountants and bookkeepers who process payroll and issue paychecks or have responsibility for depositing FICA and withholding taxes may be liable by virtue of aiding and abetting the employer's unlawful treatment of employees.

This exposure exists if the matter stays between you and the worker in federal court. If the Labor Department gets involved, you face penalties of $1,000 or more for each willful and repeated violation of overtime pay requirements.

The State of Arizona has its own employee-protection laws (A.R.S. §§ 23-351 and -355 ) that largely mirror the federal requirements. Not surprisingly, Arizona's laws also provide a mechanism for the employee to collect unpaid wages, along with attorneys' fees and costs in bringing the lawsuit. Further, A.R.S. § 23-364(C) provides that, if the State gets involved in a minimum wage dispute, perhaps as part of an investigation that initially focused elsewhere, the State may review the internal records regarding all employees in order to protect the identity of any employee identified in the complaint.

Defenses. Depending on the circumstances, you may have certain defenses, stemming from whether the employee had:

• supervisory or managerial duties,

• authority to hire or fire employees,

• employees reporting directly to him or her, or

• the ability to use discretion regarding major work-related decisions.
  

For every one of those circumstances that applies, the stronger your argument that the worker was exempt from overtime and properly treated as a salaried employee.

What to Do. If you believe you are at risk of facing an FLSA-based employee lawsuit, you should:

• contact your insurance agent and/or broker to see what types of insurance coverage may exist for some of these violations;

• carefully review your record keeping and employment practices to ensure you comply with state and federal requirements; and

• consider engaging a human resources consultant with expertise in wage-and-hour record-keeping and compliance.

You should also call your lawyer. If your current law firm has specific experience in wage-and-hour violations, they can guide you through the coming steps. If they do not offer the expertise you need, we invite you to contact us. We can help you evaluate your liability and represent you in defending against the employee's claim or, if the particulars of your case require it, refer you to an attorney who has the specific experience you need.