Off-the-Clock Claims & Consequences of Improper Pay

The failure to correctly pay employees as required by the Fair Labor Standards Act (FLSA) or similar state wage laws causes the most frequently filed type of lawsuits by employees against their employers. The claims made in these cases are more often than not proven true. The Biden administration has announced its intention to focus more aggressive enforcement efforts on these wage and hour compliance issues.

The FLSA has existed since the Great Depression. In addition to mandating a federal minimum wage, it mandates overtime pay of one-and-one-half times an employee’s regular rate of pay for all hours worked over 40 in a workweek. In response to massive unemployment, the overtime requirement was intended to create more jobs by making employees who work long hours become more expensive. By requiring a 50% premium for an employee working more than 40 hours, it was thought employers would find it cheaper to hire additional employees to work more hours at straight time pay. The FLSA applies to virtually every workplace.

The primary reason employees allege FLSA violations as the basis of so many lawsuits is that violations are easy to prove. Additionally, an award of damages normally includes liquidated (double) damages, as well as attorney’s fees. Class or “collective” actions involving unpaid overtime have resulted in multimillion-dollar judgments and settlements covering thousands of employees of some of the nation’s largest companies.

Misclassification

Perhaps the largest cause of liability for unpaid wages is the misclassification of employees as exempt from overtime. The white-collar exemptions under the FLSA set out categories of employees exempt from overtime pay, which are executive, administrative, professional, computer employees, highly compensated employees and outside sales exemptions. To be exempt, the employee must generally be paid above the minimum salary and perform specified duties.

Salary Rules

The minimum salary required for exempt status under the FLSA is currently $684 per week ($35,568 annually). The “computer employee” exemption has two, separate minimum pay limits under different FLSA provisions. There is a minimum salary similar to the other exempt categories, as well as an hourly rate of no less than $27.63 per hour. The “outside sales” exemption has no minimum salary requirement.

Duties Rules

The required duties for the “executive,” “administrative” and “professional” categories sound relatively straightforward. To be an exempt “executive,” the employee must have as their primary duties the management of the enterprise or a recognized department thereof, the direction of two full-time employees or their equivalents, and have the authority to hire, fire, promote or to effectively recommend such action.

To qualify for the “administrative” exemption, an employee must have as their primary duty the performance of office or nonmanual work directly related to management or general business operations. The person must also
exercise discretion and independent judgment with respect to “matters of significance.”

Exempt “professionals” generally fall into two primary categories: “learned” and “artistic/creative.” By far, the most common are “learned” professionals. They must perform work requiring advanced knowledge in a field of science or learning, which generally involves a prolonged course of specialized instruction. Only computer professionals performing high-level technical work such as systems analysis, computer systems or program design and similar, specialized functions qualify.

To qualify for the “outside sales” exemption, the employee must regularly be engaged in sales functions away from the office. Inside sales personnel do not qualify for the exemption.

Independent Contractors

In this age of Uber, Lyft and countless other gig-economy jobs, the question of who truly qualifies as an “independent contractor” is a hotly contested issue. The issue has arisen regarding Microsoft contract workers, Uber and Lyft drivers, Fed Ex and Grubhub delivery personnel, and numerous others. In 2019, the United States Department of Labor (DOL) issued revised guidelines on who qualifies as an independent contractor. The Biden administration has put these guidelines on hold for further review. They will likely be rescinded in favor of what is referred to as the “ABC test.”

Under that test, the relevant factors are whether the worker is 1) is free from control and direction of the hiring entity; 2) performs work that is outside the normal course of the hiring entity’s business; and 3) is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed. The goal is to make proving independent contractor status more difficult.

Off-the-Clock Work

In addition to employee misclassification, another cause of overtime liability is the failure to pay for all hours worked by an employee. In most cases it involves preliminary or subsequent functions that are part of the employee’s principal activity. It is not uncommon for a conscientious employee to engage in preparations before clocking in. These preparations could be setting up a machine, gathering the necessary supplies for the day’s work, sorting through daily work orders or production schedules, or similar preparatory functions. Similar activity can occur at the end of the workday, after the employee clocks out. It could involve completion of production reports, a meeting with employees coming on shift about problem issues or similar work-related activity.

In addition, modern business is largely conducted through email, text and similar electronic communication. An increasing reliance on tablets, phones and laptops can mean that, for many employees, the workday is never really finished — if a nonexempt employee spends time completing a report or responding to emails or texts before or after regular work hours, there is potential overtime liability being generated.

The circumstances that create liability are as varied as our workplaces. If work is performed, what is normally unpaid time would become worktime necessary for inclusion in properly calculating overtime. Employers can avoid much liability for off-the-clock work by maintaining policies prohibiting off-the-clock work, requiring employees to promptly report any unrecorded work, and taking efforts not to prevent or discourage employees from reporting any worktime. Employers should prominently post notices regarding these policies and should also periodically remind employees about them.

As these various examples make evident, the potential for improper pay exists in a wide variety of circumstances. Off-the-clock claims are one of the most frequently filed lawsuits employers confront, and one the DOL will target for enforcement. By adopting proactive policies and monitoring for potential off-the-clock work by employees, the risk of facing such lawsuits can be drastically reduced.