Periodically this year, we have discussed some of the fundamentals of wage and hour law, starting with a general review of the white collar exemptions. We will continue to periodically review some of the more fundamental concepts of the FLSA, including a comprehensive review of the new FLSA exemption rules that we expect the DOL to issue at some point this year. As always, remember that these are just the basics: the application of these rules to specific facts is where the rubber really meets the road for employers.

In this installment, we’ll look at the penalties for noncompliance with the FLSA. As you know if you have been following this blog, the FLSA requires that employers pay employees time and one-half of their regular rate of pay for every hour they work in excess of 40 hours in a given workweek under 29 U.S.C. § 207(a). There are exceptions and exemptions to this requirement and the method of overtime calculation, of course, but we’ll stick to the basics for now.

Employers that fail to make proper overtime payments are liable to employees in a private action filed in a federal district court for their unpaid overtime compensation. 29 U.S.C. § 216(b). Paying the backpay amount owed is a pretty obvious remedy, but what about other available damages? Some state laws, like Illinois’ Minimum Wage Law, provide for some form of interest payments, but the FLSA takes a different approach. In addition to backpay, employees may recover what are referred to as “liquidated damages” under the FLSA. “Liquidated damages” is a legal term of art used throughout statutes and in private contracts, and provides that a noncompliant party will pay a fixed sum of money.

Under the FLSA, liquidated damages are an amount equal to the pay employees should have received. In other words, employees can recover double “backpay” damages for unpaid overtime. As the Seventh Circuit has explained, doubling the unpaid overtime “is not some disfavored ‘penalty.’ [There is] a strong presumption in favor of doubling, a presumption overcome only by the employer’s ‘good faith . . . and reasonable grounds for believing that [the] act or omission was not a violation.” Thus, employers can only avoid double damages for unpaid overtime if they can show that (1) their actions were taken in good faith and (2) they had reasonable grounds for their belief that they were complying with the FLSA.29 U.S.C. § 260.

So how do employers meet those two tests? Under the “good faith” component of the test (the first element), courts will view the conduct from the perspective of the employer, but require a measure of subjective reasonableness. Usually, that means that an employer must take some concrete action to demonstrate its violation was not willful. Doing nothing isn’t going to shield the employer from double damages. Courts have held that an employer cannot “simply remain blissfully ignorant of FLSA requirements” to avoid double damages under the FLSA.

For example, in a 2011 case from the Fourth Circuit, Perez v. Mountaire Farms, Inc., the employer, a chicken processing plant, was found liable under the FLSA for failing to pay workers for time they spent donning and doffing protective gear. Nonetheless, the district court did not award liquidated damages because it concluded that the employer acted in good faith. The Fourth Circuit explained:

Mountaire also produced evidence of its good faith by showing that the company relied on the advice of David Wylie, an attorney retained by the National Chicken Council. Mountaire presented to the district court fourteen letters and memoranda from Wylie in which he interpreted donning and doffing cases from various jurisdictions, provided updates on plant surveys conducted by the Department of Labor, and advised poultry companies on how the companies could alter or maintain their practices to remain in compliance with the FLSA, as interpreted by different courts. The district court found that Mountaire “clearly” changed its policies based on Wylie’s information and advice.

By showing that it sought (and followed) the advice of qualified wage and hour counsel, Mountaire Farms avoided what would have been nearly $750,000 in liquidated damages. As this decision demonstrates, an employer’s assumption that its classifications comply with the FLSA alone, does not establish reasonableness because an assumption does not amount to an affirmative, “good faith” step.

The “reasonable grounds” component of the test (the second element) requires objective reasonableness. Employers can establish reasonableness if they actually rely on a reasonable, albeit erroneous, interpretation of the FLSA and its accompanying regulations. In other words, it’s not enough to consult wage and hour counsel in good faith. Courts also require employers to show that they followed that advice, like Mountaire Farms did. For example, the Tenth Circuit awarded liquidated damagesagainst an employer who sought (and followed) legal advice on how to properly pay day rates under the FLSA, but then ignored counsel’s advice that its failure to pay overtime, regardless of the day rate, violated the FLSA.

Courts have found that an employer can more easily demonstrate reasonable grounds where the issue is novel, different, confusing, or unsettled. The absence of precedent is also a relevant factor when determining objective reasonableness. For obvious reasons, employers have to take affirmative actionbefore plaintiff’s counsel files a lawsuit or the DOL begins an investigation. A good faith inquiry into a perfectly reasonable interpretation of the FLSA will do you no good after the fact.

As this discussion suggests, avoiding liquidated damages will depend on the particular facts of the situation. Since most lawsuits and DOL investigations aren’t looking at last week’s paycheck only, the next relevant question is how far back employees can go in seeking unpaid overtime. We’ll tackle the FLSA’s statute of limitations in our next Wage and Hour Basics installment.