By Sean McDevitt
The Fair Labor Standards Act (FLSA), in its original form, was designed to protect workers by imposing overtime premiums, establishing minimum wages and abolishing the use of oppressive child labor. But today, nearly 70 years after the act’s inception, some believe it is the employees, counseled by plaintiffs’ lawyers, who are taking advantage of their employers.
In recent years, FLSA litigation in the financial services industry has exploded. A variety of high-profile companies have been sued by their salaried employees, despite the fact that the FLSA was originally designed to protect workers paid an hourly wage. A sophisticated plaintiffs’ bar, the ability to recruit numerous clients via the Internet and the extension of legal doctrines to areas never seen before have all combined to make attractive cases for employees and attorneys seeking to exploit companies who are often unaware that they are not in compliance with the FLSA.
Employees file suit in one of two ways. The first category involves claims that non-exempt employees have been improperly classified as exempt, while the second pertains to a practice known as “hours shaving.”
In “designation” cases, claims typically involve loan officers or financial services consultants who have historically been exempt. The plaintiffs claim they have been improperly classified under either an executive, professional or administrative exemption, but do not perform the duties required to justify this job description. These employees are often highly compensated and their claims can present significant exposure. When such claims are brought on behalf of similarly situated employees, the exposure becomes much greater.
In “hours shaving” cases, non-exempt employees, such as tellers, administrative support personnel or other hourly paid employees, assert that managers coerce hourly employees into working “off the clock.” Managers engage in this practice in an effort to reduce expenses, thus enabling them to spruce up the bottom line and earn a bonus or other award.
The FLSA also provides for “reasonable attorneys’ fees” if the employee prevails in his or her claim. To calculate this fee, a reasonable hourly rate for the attorney’s level of skill and experience is determined and then multiplied by the number of hours spent on the case. Often, this figure far exceeds the amount of the underlying claim, therefore providing significant incentive for a plaintiff to take claims on behalf of employees at any compensation level.
Experienced plaintiffs’ lawyers often bring FLSA claims as class or collective action cases. This allows them to bring claims on behalf of hundreds, if not thousands, of employees. Because FLSA claims are typically uninsured, successful cases can present a direct threat to the well-being of the financial service enterprise.
Conducting an Audit
The FLSA provides for exemptions that absolve employers from paying overtime to employees with certain job duties. However, due to changes in the economy since the inception of the FLSA, the exempt/non-exempt distinctions that were clear in the early years are much less obvious in today’s information economy. Employers must step back and take a fresh look at whether exempt/non-exempt classifications are proper. The following exemptions under the FLSA have been the primary battleground in exemption classification cases:
Executive Exemption: Employees who fall under this exemption have the primary duty of management in the company and direct the work of at least two full-time employees. These employees should also have the ability to hire and fire other employees and their voice within the company should be given a particular weight.
Administrative Professional Exemption: Individuals whose jobs consist of performing office or non-manual work directly related to management or the general business of the employer are usually not eligible for overtime pay.
Professional Employee Exemption: An employee who performs work requiring advanced knowledge of science or learning, and has acquired this knowledge through extended courses of instruction, is also exempt.
Employers are required to keep clear records that demonstrate compliance with the FLSA. Therefore, company policies should include reliable record-keeping practices that will prove compliance, establish specific procedures to approve overtime before it is worked, and set forth clear payroll practices for computing overtime pay.
Companies that are vulnerable to lawsuits related to overtime pay should conduct an audit of their business to ensure they are meeting FLSA standards. Once this is complete, the company should establish a compliance program that will oversee the proper handling of overtime pay.
The compliance program is designed to:
Ensure proper employee classification as either exempt or non-exempt;
Ensure proper computation of overtime premiums;
Develop a reliable record-keeping system;
Develop clear, effective overtime approval policies;
Document FLSA compliance with evidence that would be admissible in court; and
Properly train managers to comply with the FLSA.
Overall, these housekeeping exercises are critical to maximizing the chances for a successful outcome or to avoiding FLSA claims altogether. Companies should be proactive in defending themselves against potential FLSA lawsuits and this is best done by auditing the entire business before any complaints are raised.
Sean McDevitt is a partner at Pepper Hamilton LLP (www.pepperlaw.com) and the leader of the new practice that audits companies to determine the degree to which they are in compliance with the Fair Labor Standards Act.
Copyright 2007 The Warren Group