Wage and hour claims are both skyrocketing in number and quickly becoming the largest source of employment-related liability. In 2015, employees filed three times as many wage and hour actions as they had just a few years earlier. These claims have cost employers significantly, with the average wage and hour case settling for $5.3 million. Given the complexity of wage and hour laws, and given that employers must comply with both state and federal laws, employees prevail on wage and hour claims far more often than they prevail on other types of employment claims.
To make matters worse, the U.S. Department of Labor is attempting to change the rules for when employees must receive overtime pay. These new rules would significantly increase the minimum salary an employer must pay an employee in order to treat the employee as “exempt” from federal overtime requirements. Where today an employer must pay an employee $455 per week on a salary basis in order to invoke the executive, administrative and professional exemptions (in addition to satisfying other requirements), the DOL is seeking to raise this minimum salary to approximately $970 per week.
The DOL also plans to adjust this salary floor annually, on an automatic basis, so that it would rise with the Consumer Price Index for All Urban Consumers. The proposed rule also would make it more difficult for employers to invoke overtime exemptions in other ways, such as by raising the minimum salary for the “highly compensated employee” exemption, and possibly by changing the specific tasks that employees must perform in order to qualify for exemptions.
The DOL likely will publish its final rule in the next few months, at which point it will clarify exactly what changes it will make and announce when the changes will become effective. When that happens, it will make this complex area of law even more difficult to navigate.
Fortunately for employers, there are three straightforward steps they can take to minimize their exposure to this growing area of potential liability:
1. Regularly Audit Pay Practices
Although it is the oldest cliché in a lawyer’s arsenal, the phrase “an ounce of prevention is worth a pound of cure” is particularly true regarding wage and hour liability. A wage and hour audit – where an employer analyzes its pay practices to confirm they comply with the law – is the most effective way for an employer to identify and correct any inadvertent violations before they prompt a lawsuit. And, although employers sometimes think wage and hour audits will be costly and difficult, that usually is not the case.
Under most circumstances, an employer can audit its pay practices for a specific position in just a few hours, particularly where the employer enlists an experienced employment lawyer and a diligent human resources official. Moreover, after an employer conducts its first audit, all subsequent audits tend to go more quickly and efficiently. To the extent the audit uncovers a violation, there are ways to correct it while minimizing potential liability. In short, for an employer seeking to reduce its exposure to wage and hour liability, an internal audit is the best place to start.
2. Consider Arbitration Agreements With Class Action Waivers
Employers also can take advantage of a valuable tool that courts have continued to make available. Last December, the U.S. Supreme Court once again held that the Federal Arbitration Act allows for arbitration agreements where parties waive the right to bring class or collective actions. Stated in English, this means that an employer and employee usually can enter into an agreement where the employee agrees to resolve any claims against the employer in arbitration (rather than in court) and as an individual (rather than as part of a group). Moreover, in some jurisdictions, these agreements can significantly reduce the time an employee can wait before filing an action.
These agreements drastically reduce an employer’s exposure to wage and hour claims. This is because plaintiffs’ lawyers usually cannot pursue individual wage and hour claims in a cost effective way; rather, they usually must bring these claims on behalf of a group of employees, which exponentially increases the damages they can recover. Where an employee waives the right to bring a class or collective action, however, that often will discourage a plaintiff’s lawyer from filing suit or, at a minimum, allow the employer to resolve the action more efficiently.
For these reasons, every employer should strongly consider entering into these types of agreements with employees. Although there are some potential drawbacks, the benefits of these agreements usually outweigh them.
For example, although an employer must follow careful steps when offering the agreements to employees, a capable human resources official usually can oversee the process. Similarly, although the National Labor Relations Board believes that these agreements are not enforceable, federal courts disagree with the NLRB, and federal courts are the final decision maker on the issue. Because these agreements can reduce – and sometimes negate – a huge area of potential liability, they can be an excellent investment.
3. Understand The “Salary Basis” Test
Although there are myriad nuances in state and federal wage and hour laws, one common pitfall arises when an employer misapplies the “salary basis” test. As background, in order to invoke the “white collar” overtime exemptions under federal law, an employer must pay its employees at least $455 per week “on a salary basis” (or, in the near future, whatever new amount the DOL requires). In order to satisfy this requirement, however, an employer must do more than simply call the employee’s pay a “salary.”
Rather, in order to satisfy this requirement, an employer must refrain from deducting amounts from the employee’s salary, even where the employer might consider the deduction appropriate. Except in certain limited circumstances, the salary basis test requires an employer to pay an employee his or her full salary in each week in which the employee performs any work.
For example, an employer may not reduce an employee’s pay because an employee left work early for personal reasons, missed a day for military leave, or accidentally damaged a piece of equipment. If an employer reduces an employee’s salary in these circumstances, the employer arguably will invalidate the “salary basis,” and thus void an overtime exemption that otherwise would apply to the employee. By understanding and properly applying this salary basis requirement, an employer can avoid one of the more common causes of inadvertent overtime violations.