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Employers Struggle to Control Wage-and-Hour Litigation

Employers can minimize the chances of litigation by taking steps that include periodic audits to determine whether employees are being properly classified, as well as careful record-keeping.

April 2, 2012
Related Topics: Miscellaneous Legal Issues, Top Stories - Frontpage, FLSA, Legal Compliance, Payroll, Growth, Wages and Hours, Legal, Latest News
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Wage-and-hour lawsuits are becoming a major concern for employers as more suits are filed, observers say.

The complexity of federal and state laws, the relative ease of winning class action certification and workers laid off as a result of the weak economy have led to more litigation in recent years, observers say.

For example, the Department of Labor said there were 40,000 wage-and-hour complaints during fiscal 2010, up about 15% from the roughly 35,000 complaints in fiscal 2009.

Many claims fall into two major categories: misclassification of workers as exempt, and unpaid overtime, observers say.

However, employers can minimize the chances of litigation by taking steps that include periodic audits to determine whether employees are being properly classified, as well as careful record-keeping.

When employers are sued, experts say settling the case may be the wiser course.

Wage-and-hour litigation is the fastest-growing type of class action, legal experts say.

"If you asked me what was the headache that kept folks up at night five years ago when it comes to workplace-related lawsuits, I'd say employment discrimination lawsuits," said Gerald L. Maatman Jr., a partner with law firm Seyfarth Shaw L.L.P. in Chicago.

"Today, the headache that keeps people awake at night" is wage-and-hour litigation, he said.

"If you're interested in saving money and avoiding the courthouse, I think that's the No. 1 issue right now," Maatman said. "Every year we think we're at the top of the bell curve, but we haven't reached that yet."

"It's one of the biggest threats to employers from an employment law standpoint," said Brian T. McMillan, a shareholder with Littler Mendelson P.C. in San Jose, California. "Plaintiff attorneys have kind of stumbled upon what is now the litigation du jour," which can mean "enormous liability" for employers as well as plaintiffs' ability to recover attorney fees, he said.

Among reasons for the lawsuits' growth is establishing a class action under the Fair Labor Standards Act is relatively easy under the federal rules of civil procedures, said Paul J. Siegel, a partner with Jackson Lewis L.L.P. in Melville, New York.

The FLSA, which was created in 1938 to protect industrial workers from exploitation, guarantees employees time-and-a-half-pay for hours worked beyond a 40-hour week, unless they are salaried and fall into one of three main exempt categories: professional, executive or administrative.

Observers say even if the time at issue is just a few minutes per worker, a class action can add up to substantial costs for employers when multiplied by thousands of workers.

"While hopefully few people are discriminated against, everybody receives a paycheck, and therefore can be in a group together," Mr. Siegel said.

"Success begets copycats," Maatman said.

Successful litigation in the early part of this decade has attracted attorneys to the area, Maatman said. In addition, plaintiffs attorneys realized "it didn't take money to be able to bring these sorts of cases" the way it does to bring large-scale cases alleging discrimination or violation of the Employee Retirement Income Security Act, where plaintiffs must invest in expert testimony and pay for it from their own pocket, he said.

"They can do without an expert" in wage-and-hour suits and "can get a class certified pretty quickly," Maatman said. "So when a client walks into their office and says, "This is how I was paid,' they can sue on behalf of that client and anyone else in the common payroll system," he said.

Furthermore, unlike discrimination cases that must first be presented to the Equal Employment Opportunity Commission, a plaintiff attorney can see a client on Monday and file suit on Tuesday, said Maatman. It is a "much, much more user-friendly system for the plaintiffs' system," he said.

The weak economy also has played a role in rising litigation as laid-off workers go after their previous employers, said Lawrence S. McGoldrick, of counsel at Fisher & Phillips L.L.P. in Atlanta.

The complexity of the rules, which vary among the state and federal laws and are easy to inadvertently break, also are a factor, legal observers say.

"There is no turnkey solution that you can just plug in," said Phillip Schreiber, a partner with Holland & Knight L.L.P. in Chicago.

"It's hard to be in full compliance, even for a good employer," McGoldrick said.

"When you consider whether or not an individual is properly classified as an exempt vs. nonexempt for overtime, it's nothing that they can just look up and get a definitive answer for," McMillan said. "The decision rests upon a specific case-by-case actual analysis as to what the particular employer does day in and day out, so it's difficult, even as a lawyer, to provide guidance."

The nature of today's jobs also is a factor.

"You have employees who are not working in centralized locations where they can be monitored" and their hours worked tracked easily, said Michael C. Schmidt, a member of law firm Cozen O'Connor P.C. in New York.

Working with email and BlackBerrys "tend to be outside the traditional norms, which makes it harder for employers to control and record those" specific hours worked, he said.

In addition, budget-stretched state and federal governments are targeting independent contractors to make sure the contractors pay their fair share of payroll taxes. They are not just looking to do justice but "also seeking to get back revenue," said Schmidt.

The Labor Department also has been active on the issue, observers say.

The employer's location also makes a difference, legal experts say.

"An employer needs to consider where in the country your facilities are located," said Siegel. "If you're in California, if you're in Florida or New York City, you're going to see far more" wage-and-hour activity than in other parts of the country. In some cases, it is a reflection of local laws; and in others, of the local bar, Siegel said.

Many point to California as being particularly difficult for employers.

McMillan said the state "has just so many specific wage-and-hour rules and regulations that a lot of employers that have all the intent of wanting to comply with the law don't often know about all the specific rules, and therefore it's difficult for them to comply with all the technicalities."

Insurance coverage is not widely available, observers say. According to a December study by Sterling, Massachusetts-based Betterley Risk Consultants Inc., some insurers offer only defense coverage or defense and settlement insurance, but both often are subject to sublimits.

Judy Greenwald writes for Business Insurance, a sister publication of Workforce Management. To comment, email editors@workforce.com.

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