Wage & Hour Claims: What Employers Should Know

Recent high-profile wage and hour class-action lawsuits highlight the high cost of these claims. But the fact is, many claims aren't intentional. Business owners can accidentally violate labor law. Imagine this:

• Your HR manager writes a company PTO policy regarding payouts. In your policy, employees are eligible if they've worked for your company for a year. And at the time of writing, it's all legal in your state.
• Within two months, the state rolls out a specific policy. This policy says an employee is eligible if they worked for you for six months.
• But your HR manager forgets to update the policy for another three months. Within that time, a terminated employee is denied PTO payout, even though they were eligible.

This is technically a wage and hours claim. 

There are ways to safeguard your business against such claims. Let’s explore how businesses can successfully follow wage and hour laws.

First, we need to outline what counts as a wage and hour claim.

What is a Wage and Hour Claim?

Wage and Hour claims are when a current or former employee claims their employer violated Labor law. Labor law includes unfair pay, labor hours, withheld overtime pay, and other unfair treatment. These labor standards are referenced in the Fair Labor Standards Act (FLSA), and any state-specific laws.

The federal FLSA regulates employment law, such as

• Minimum wage rates
• When and how much an employer must pay for overtime
• Protection for minors

There are few exceptions to Labor law. For example, the regular minimum wage does not apply to restaurant servers, who supplement their income with tips. 

FLSA also mandates employer recordkeeping. Employers must retain accurate records of pay rates and employee hours. These files may have employee personal information, earnings, and pay period totals.

Besides FLSA, each state has its own legislation about wages, hourly pay, overtime, and more. An employer is subject to both state and federal law. This is where the potential lawsuit can come in if any of these regulations have been violated. 

In short, if an employee has been unfairly compensated for their time and labor, the lawsuit filed is a wage and hour claim.

Common Wage and Hour Claims

The most common reasons an employee pursues a wage and hour lawsuit include:

Unfair Overtime Compensation

Never ask or tell a non-exempt worker to work "off the clock." 

Telling employees that they will get time off in the future to make up for extra hours worked is also illegal. If an employee works overtime, they get overtime wages. 

Many employers mistakenly think that if their company has a policy in writing that says they "won't pay overtime" or "won't pay unapproved overtime," that's enough. It’s not, and it violates FLSA. It is extremely risky to have a policy about overtime that is not in line with the FLSA. The existence of such a policy could be used against the company in court.

Unpaid Training, Workshops, and Meetings

Anytime a worker is required to spend work time on workshops, meetings, or training, they must be fairly compensated. Any work-related task that benefits an employer and occurs on the clock requires compensation.

The only time payment is not required is when all four of the following conditions are met:

1. Attendance is outside the employee's normal working hours,
2. Attendance is voluntary,
3. The task is unrelated to the employee's job, and
4. The employee doesn’t do anything productive during the meeting. 

If there are any consequences for missing the meeting, the employee must be compensated. An employee should not be penalized if they don't attend.

Unpaid Meals or Breaks

Individual states have their own rules and regulations on employees’ rights to rest. Typically, anything shorter than 20 minutes is part of an employee’s work day and should be paid. 

Different states also have different laws regarding minors and work breaks. Some states require minors to have a break after every five hours of work. Adults don’t get a break until after seven hours. 

Not Paying Back Pay

Back pay is used to make up for any difference between what an employer paid an employee and what the employer was required to pay. This amount is dictated either by law or by the terms of a contract. It can include salary, hourly wages, overtime, fees, bonuses, or commissions. In addition, it is often part of the fine an employer has to pay when they break the wage law.

According to the FLSA, working more than 40 hours in seven days entitles workers to 1.5 times their regular hourly wage for each overtime hour.

What are Exemption Classification Errors?

Exemption classification errors arise when an employer misclassifies an employee. Failing to recognize exempt employees can result in owing overtime wages and other penalties.

An exempt employee isn’t subject to FLSA minimum wage and overtime rules. Roles that typically fall in this category:

• C-suite executives
• Departmental managers
• Administrative employees
• Independent contractors
• IT professionals

CEOs, managers, experts, and software engineers are examples of positions that would be exempt. These exempt employees receive a set pay regardless of how many hours they work weekly. They are usually referred to as “salaried” workers. These workers earn the same income whether they work 10 or 75 hours each week. They're compensated for their services, not their time.

On the other hand, non-exempt workers, who are covered by FLSA overtime and minimum wage rules, receive hourly wages. Some receive a salary based on hours worked, rates per piece, commissions, or a combination.

Misclassifying a non-exempt worker as exempt leaves your company open to penalties. If a company is found guilty, the organization must pay the employee all owed wages. Furthermore, the court can also punish the company in other ways, such as doubling the number of unpaid wages owed. Or making the employer pay the employee's lawyer fees (plus their own).

Considerations for Gig and Part-Time Workers

As companies hire professionals for gig or freelance contract work, classification becomes even more complicated. 

Generally, employees are W-2 workers, while independent contractors sign a W-9. When working with an independent contractor, an employer will likely sign a contract. This contract establishes the role of both parties. In addition, the employer cannot control how and when a freelancer works. 

An independent contractor typically works for an employer for a shorter period of time. They do not usually contribute to the regular work of the company. For example, a technology firm might hire a graphic designer or content writer to assist the marketing team during a product launch.

Here are some examples between the two classifications:

Independent contractors and gig workers do not qualify for FLSA minimum wages and overtime. 

To help employers better understand worker classification, the IRS has made a guide to help classify workers.

How to Decrease Your Chance of an FLSA Violation

A dedicated HR specialist and legal team can help you to minimize the possibility of costly wage and hour investigations, liability for unpaid wages, liquidated damages, and legal fees.

Intentional FLSA violations can result in a fine of $10,000, but a second conviction can result in prison time. Those who violate minimum wage requirements can be fined $1,000 for each offense.

As a result, you should consider protecting your business against FLSA infractions.

Here are three ways to reduce your chance of unintentionally violating labor standards.

1. Check an employee's status

Employers must consider what type of status an employee has under the FLSA. First, a business must establish if the worker is considered exempt or non-exempt under state and federal law. Next, they must also check whether a worker is an employee or an independent contractor.

Before paying employees on a salary basis, you might want to use the DOL's FLSA Overtime Security Advisor to confirm each role meets the requirements.

2. Keep thorough records

Employers must keep excellent records of employee behavior to limit potential claims. Firms should retain accurate timesheets and records of hours worked, breaks taken, time traveled for work, and other data needed to pay employees properly and legally. Clear records of all work activity, including wage payment, vacation pay, and all hours worked, will be essential if an employee files a claim. A clear process also reduces the likelihood that your business might miss a payment. It’s important to note that in your documentation, you should never refer to an independent contractor as an employee. This could later be used as evidence of misclassification. 

3. Compare and comply with state laws

In some cases, state laws have higher wage requirements than the federal Fair Labor Standards Act. The employer must follow the law that is most favorable to the employee. 

For example, California law sets the minimum wage at $15, while the nationwide minimum wage is just $7.25. Thus, businesses operating in California must pay a minimum of $15 an hour. This also applies to overtime requirements.  

FAQ

What is a wage order?

A wage order handles industry-specific rules regarding employment law in certain states, such as California and New York. 

Wage orders may differ from federal regulations on how employers should approach minimum wage, overtime, breaks, working conditions, and other employee rights.

What is not included in wages?

Wages under the Fair Labor Standards Act address base salaries and minimum wage. It does not mention vacation pay, sick leave, severance, education benefits, life insurance, or other potential cash incentives. What is considered part of employee wages may differ per state.

What is wage theft?

Wage theft is when an employer fails to pay employees or provide employee benefits as stipulated by law or contract. This can take the form of

• Withholding wage payment
• Unpaid overtime
• Misclassification
• Illegal deductions
• Denying vacation time
• Failing to provide other agreed-upon forms of compensation

Final Thoughts

Understanding the FLSA and its rules can be a full-time job in and of itself. You might not have the time, the staff, or the money to make sure your business is in line with the FLSA. Ideally, you have a designated compliance professional in-house, or you are outsourcing your HR needs. But there’s more to minimizing risk and operating efficiently, than having a stellar HR team. 

You’ll also want to protect your organization in case of a claim. Employment practice liability insurance (EPLI) policies safeguard companies against potential wage and hour lawsuits or misclassification. 

Learn more about how to protect with Counterpart’s AI-driven risk management approach. Or learn more about your business’s exposure with our free risk assessment.