Retailers take note. Wage-and-hour litigation has risen dramatically over the past few years, with the number of suits filed under the Fair Labor Standards Act (FLSA) increasing by almost 25 percent, from 1,562 to 1,935 suits, between 1998 and 2000, according to the Administrative Office of the U.S. Courts. Specifically, the incidence of wage-and-hour collective or class actions has grown tremendously, doubling in a two-year period.

Enacted in 1938 to govern minimum wage, overtime and child labor in the public and private sectors, the FLSA is clearly being put to the test with the advent of the new millennium’s “virtual workplace.”

The FLSA has not been amended to deal with the complexities of the 21st century workplace. Telecommuting employees and flexible scheduling arrangements are just a few of the changes to which employers must attempt to fit within a rigid, antiquated 1938 statute. The unprecedented increase in wage-and-hour class and collective actions and the immense verdicts resulting from these suits is a further example of the FLSA’s emergence into the 21st century.

The suits being filed allege a variety of wage-and-hour law violations. Retailers are especially vulnerable to these types of claims, which often involve allegations of off-the-clock work. Retailers should create and enforce policies to avoid the mistakes typically made, including failing to accurately identify and pay for all time worked, improperly classifying managerial or other employers as exempt from the requirement of overtime pay and requiring hourly, nonexempt employees to work “off the clock.”

Retailers should also keep in mind that the improper classification of employees as “executive” or “administrative” is the most common and costly mistake made by employers. And, when you consider that some so-called exempt employees earn upwards of $40,000 annually, the unpaid overtime costs are high.

The FLSA requires that employees working more than 40 hours per week be compensated at a rate of one and one-half times their regular wage. However, executive, administrative and professional employees are exempt from the FLSA’s overtime provisions. To be exempt, an employee’s duties must fit the FLSA’s test and he or she must be paid on a salary basis, earning at least $455 a week. Additionally, there are other exemptions that are industry- or job-specific.

Retailers should be aware that there is an exception for certain retail employees. Employees who earn at least 1.5 times minimum wage (currently $5.85) and earn at least half of their income in commissions are not required to be paid overtime. Implementation of this exemption should be done in consultation with Human Resources and/or legal counsel.

While individual employees generally have relatively small claims for unpaid overtime and/or other wages, the effect of these plaintiffs forming nationwide class actions is disastrous for most employers.

Given the large verdicts and settlements, employers should expect and prepare their companies for a continued increase in wage-and-hour collective and class actions at federal and state levels. Many retailers have paid millions of dollars in settlement and/or judgments resulting from these types of claims. Retailers should be concerned as wage-and-hour class and collective actions result in multi-million dollar verdicts, which include back pay, interest, penalties and attorney’s fees. Media coverage of these multi-million dollar verdicts has triggered an onslaught of cases against every type of employer by employees discovering their rights or potential rights.

The penalties are staggering, as an employee earning $10 an hour who worked 50 hours a week for three years — a mere 10 hours of overtime per week — will be due $45,000 if a court finds a willful violation of the law and doubles the unpaid overtime.

It takes only one employee to file a complaint with the U.S. Department of Labor or his or her state’s Department of Labor and initiate an investigation. Multiplying that employee’s claim by 20, 500 or even 1,500 workers (in some cases) could lead to an employer’s financial devastation.

Wage-and-hour “class actions” filed under the FLSA, 29 U.S.C. Section 216(b), are technically called “collective actions,” while true class actions are those filed under state labor laws. Under 216(b), similarly situated plaintiffs can join together in a collective action to recover back pay and liquidated damages. In a collective action, plaintiffs are required to “opt in,” or affirmatively indicate their intent to participate in the action, whereas the true class action under Federal Rule of Civil Procedure 23 has no such requirement.

While misclassification and subsequent failure to properly pay overtime is the most common pitfall, there are a variety of ways in which employers can find themselves lost in the FLSA’s wage-and-hour quagmire.

Retailers should make sure their companies take vigilant and proactive approaches to their pay structures and overtime pay issues to avoid falling prey to class actions. Employing an attorney specializing in labor and employment issues to conduct a private audit of workplace and payroll practices to ensure compliance with both federal and state wage-and-hour laws is vital to avoid liability for class-wide unpaid wages and penalties.

While the auditing process may seem burdensome or expensive, these costs are minimal when compared to the substantial financial risks associated with litigation or agency action. Employers who have completed audits of their workforce are less likely to have Department of Labor audits and/or lawsuits that uncover violations and lead to costly damages.