It is no secret that the number of complaints lodged against employers with the Department of Labor (“DOL”), Wage and Hour Division, alleging violation of the Fair Labor Standards Act of 1938 (“FLSA”) has increased dramatically over the last decade.  The number of investigations commenced by the DOL, whether prompted by employees or via random investigations, has increased exponentially, and the number of collective actions filed for alleged violations of the FLSA (or state equivalents) has increased 325% between 2001 and 2011 Typically, confidential allegations by frustrated employees have been directed toward larger corporations like RadioShack, Bloomberg, or Genesis.  Now, however, a new frontier for DOL investigations has opened: claims asserted against “Mom and Pop” operations, i.e., closely held companies that are traditionally sole proprietorships, licensees (versus franchisees) and family-owned and operated shops.

Mom and Pop operations now are receiving surprise visits by the DOL, or are named defendants in collective action lawsuits.  Why?  It appears that word has trickled down from employees of conglomerates to workers of smaller enterprises that employers must pay.  Or, perhaps, plaintiff’s attorneys in an effort to locate new terrain, are seeking unsuspecting business owners to hit with surprise claims.  Whatever the cause, Mom and Pop operations have the proverbial bulls eye aimed at their addresses.

The target companies usually have a small workforce (fewer than 100 employees), a combination of full-time and part-time hourly (“non-exempt”) employees, a few salaried (“exempt”) employees and usually have the majority of the daily business operations handled by one person – the owner (even if payroll is prepared by a third-party company).  Additionally, the target companies do not have sophisticated legal departments tasked with the responsibility of conducting periodic audits, training or simply keeping abreast of the current state of the law.  These are local companies that are neighborhood favorites (e.g., restaurants, book stores, reception halls, caterers, florists), that support other businesses (e.g., local debris removal facilities) and provide comfort during a time of need (e.g., funeral homes).

Case in point: Company X is a small, fast food licensee in Chicago.  Although Company X had hourly workers who rarely worked overtime and one salaried manager, who was well-respected, Company X was sued in a collective action for failure to pay overtime.  Despite the efforts of Company X’s owner to follow all applicable federal, state and local wage laws, and to have a payroll company deduct the appropriate withholding, the sole salaried employee sued Company X and its owner for failure to pay overtime wages.  Despite the fact that the salaried employee fulfilled the “certain duties” requirement for an exempt worker, the manager (a non-traditional college student) worked part-time and her salary did not meet the threshold payment requirement of $455 per week.  Thus, the deficient salary made the manager a misclassified “exempt” employee, and the manager was entitled to receive overtime pay for the time she worked over 40 hours in a week for the preceding two years because the unsuspecting owner “had no idea of this [$455 per week] requirement.”  Obviously, a company with a designated legal department or well-advised HR Department would know the specific criteria for classifying exempt versus non-exempt employees.  But here, the hard-working owner of this Mom and Pop operation was totally caught off guard. 

The rise in attacks against such smaller companies, who employ almost half of all private, non-farm workers in America, is a reason for concern.  Many Mom and Pop operations are “sitting ducks” unaware that they are violating the FLSA.  To defend themselves, Mom and Pop companies must stay abreast of employment rules and regulations and cannot blindly rely upon third-party payroll companies to advise them.  Rather, those businesses must ascertain whether their current policies and practices are in compliance with current law.

So, what’s a Mom and Pop to do?  The answer is simple: contact a trusted employment lawyer for a review of the company’s payroll practices, policies and procedures.  Like larger companies that routinely review classifications and policies, the Moms and Pops of the country must also review policies, practices and procedures as a regular part of its management process.  The few annual hours of review by an employment lawyer is a worthwhile investment, especially if it could potentially ward off a claim from that “well-liked” employee who later finds a way to sue the company.  Ignorance of the law remains no excuse, even for the Mom and Pop operation.  For Company X, the difference between obtaining a review of its policies and payroll practices would have alerted it to the misclassification of the sole salaried employee, and could have saved the tens of thousands of dollars that were incurred in legal fees and settlement payment.  Moms and Pops, please take this advice.  One day you will grow to appreciate it!