November 2003

Wage and Hour Laws: Unexpected Pitfalls

By Richard M. Howard

Employers are generally aware of the basic minimum wage and overtime payment requirements of the Fair Labor Standards Act (FLSA; 29 U.S.C. section 201). Certain provisions and judicial interpretations can become very expensive surprises for uninformed employers. Specifically, they relate to the following areas: obligations concerning employees that arrive before or remain after scheduled times; the method of calculating the rate of pay if overtime must be paid to a previously salaried employee; and the various penalty and attorneys’ fees provisions. “Salaried employee” refers to an employee receiving a predetermined weekly or annual rate of pay, regardless of actual hours worked. Most employers think that such individuals are exempt from overtime requirements, but not all employees can qualify as salaried or exempt employees, and reclassifying an employee can have disastrous consequences.

Ignorance of the law can result in huge monetary obligations. Employees thought to be properly paid for every hour worked, or properly paid a predetermined salary, may be owed many times any actual wage differential. Under the FLSA liquidated damages provision, wage differentials are almost always doubled. This, in addition to interest and the employee’s attorney’s fees, can vastly increase what could have been a minor expense. With this potential exposure in mind, it is imperative that accountants advise their clients as to these aspects of the FLSA.

Employees Working Additional Hours

An employer that permits an employee to work more hours than she is scheduled for can innocently stumble into a disaster. Such an employee must be paid for all time worked, even if the employer did not ask or want the employee to work such additional hours. The rule is simple; its effect is not. An employer that suffers or permits an employee to work before or after her scheduled time must pay the employee for it [29 CFR section 778.23, Moon v. Kwon, 2002 WL 31011866 (S.D.N.Y.)]. An employee’s initiative to come in early or stay late may be laudable, but the employer is obligated to either refuse to permit the employee to work, or pay for the time. Such additional hours could cause the employee to exceed 40 hours in one week, requiring payment at the overtime (time-and-one-half) rate. Furthermore, an employee who is not paid for overtime hours worked is entitled to receive liquidated damages under the FLSA. The principal overtime balance owed is doubled for the three years prior to the commencement of the action and any continuing violation thereafter. In addition, interest and the plaintiff’s attorney’s fees would also be assessed against the employer.

It should be noted that the FLSA initially provides a two-year look-back period that is extended to three years if the violation was “willful.” Virtually every employer will be found to have willfully violated the statute, as this has been defined as any act undertaken by an employer that is not based upon an attorney’s opinion [see Dingwall v. Friedman Fisher Associates, 3 F.Supp.2d 215 (N.D.N.Y. 1998)]. In other words, the FLSA essentially obligates an employer to obtain counsel’s opinion as to the propriety of its wage payments.

Calculation of Damages

If an employee does not receive proper overtime pay, the FLSA creates an employer’s nightmare. First, liquidated damages will be assessed, as described above.

Second, a successful FLSA plaintiff is entitled to payment of all attorney’s fees incurred in successfully prosecuting the action. Such fees are calculated on an hourly basis at typical rates in the community for the attorney’s level of experience, and may also be increased based upon the case’s difficulty level. The amount of attorney’s fees is not, however, typically affected by the amount recovered by the plaintiff [see Grochowski v. Ajet Const. Corp., 2002 WL 465272 (S.D.N.Y.)]. Consequently, even a relatively minor recovery of wages may also result in a substantial award of attorney’s fees, perhaps several times the amount of the damages.

Third, the FLSA calculation of damages when a salaried employee is found to be owed overtime pay generally disfavors employers. Many federal courts (e.g., the Second Circuit Court of Appeals) employ a wholly unrealistic method for the calculation of an employee’s hourly pay rate where the employee had been wrongly considered exempt. In calculating an hourly employee’s pay rate, the total remuneration received is divided by the total number of hours worked. For example, an hourly employee earning $360 in a 60-hour week is considered to earn $6 per hour, and the employer would owe $3 per hour for the additional 20 hours per week, or $60 per week. If, however, the same employee always receives $360 per week, regardless of hours worked (i.e., if that employee were treated as exempt), then it is presumed that the $360 payment covers only the first 40 hours worked. Hence, the employee is presumed to earn $9 per hour and the employer owes $13.50 per hour (time and one-half) for 20 hours, or $270 for each week [Moon v. Kwon, supra, Giles v. City of New York, 41 F.Supp.2d 308 (S.D.N.Y. 1999)]. If this continued for three years, then a liability of $9,000 for an “hourly” employee ($60 per week ¥ 50 weeks per year ¥ 3 years = $9,000) would become a $40,500 for a “salaried” employee ($270 per week ¥ 50 weeks per year ¥ 3 years = $40,500).

This difference is only the beginning. The $40,500 must be doubled for the assessment of FLSA liquidated damages, interest at 9% on the principal balance is added (approximately $10,000), and the plaintiff’s attorney's fees must also be figured in (arguably $100,000 for a fully litigated matter). This liability is aside from the employer’s own attorney’s fees.

"Collective" Actions

Many FLSA actions involve more than a single plaintiff. In these “collective” actions (as opposed to class actions), all current and past employees are notified of the action and permitted to opt into the litigation, without having to retain counsel or commence a new action. In other words, current and past employees receive a notice from plaintiff’s counsel advising that, by simply signing and mailing back a one-page form, they may receive a significant sum from the employer at no cost to themselves. Consequently, former employees are often willing to do just that. As more plaintiffs opt in, the potential liability can rapidly escalate to a major sum of money, perhaps in excess of $1 million for just 10 employees.

State Statutes and the FLSA

Employers are cautioned to consider wage and hour obligations imposed by their state’s laws. In New York, the “spread of hours” regulations require an additional hour of pay at minimum wage to be paid for each day in which an employee works 10 or more consecutive hours. More important, New York Labor Law section 190 adds three more years to the FLSA statute of limitations, creating a six-year look-back period. Such an increase can have a dramatic effect on total damages.

Traditional notions of liability simply do not apply when there are violations of state or federal wage and hour laws. Seemingly small infractions can become a staggering liability for the unwary or ill-advised employer.

Richard M. Howard, Esq., is a partner with Kaufman, Schneider & Bianco, L.L.P., in Jericho, N.Y.

Robert H. Colson, PhD, CPA
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