Wage and Hour Violations: What are the Consequences?

June 6, 2007

The Central Penn Business Journal’s Morning Roundup featured an Associated Press article entitled "Small Business Owners shouldn’t use interns as substitute employees". This is the same issue that I commented on in my last posting, but it reminded me that I missed a chance to describe the ramifications of getting it wrong.

There are significant consequences for violating the Fair Labor Standards Act (FLSA) by incorrectly paying minimum wage or overtime. Fixing a violation may involve more than just paying the compensation that was owed.

For FLSA violations, an employee may recover both back pay and liquidated damages (which is a penalty equal to the amount of the back pay). The double damages recoverable by an employee give the FLSA some real teeth.

The FLSA may be enforced by either the Department of Labor or by a private lawsuit by an employee. Listed below are methods which the FLSA provides for recovering unpaid minimum and/or overtime wages:

(1) The Wage and Hour Division may supervise payment of back pay.

(2) The Secretary of Labor may bring suit for back wages and an equal amount as liquidated damages.

(3) An employee may file a private suit for back pay and an equal amount as liquidated damages, plus attorney’s fees and court costs.

(4) The Secretary of Labor may obtain an injunction to restrain any person from violating the FLSA, including the unlawful withholding of proper minimum wage and overtime pay.

An employee may not bring suit under the FLSA if he or she has been paid back wages under the supervision of the Wage and Hour Division or if the Secretary of Labor has already filed suit to recover the wages.

Generally, a two-year statute of limitations applies to the recovery of back pay. In the case of willful violations, a three-year statute of limitations applies. For repeated violations, the DOL may also impose an additional penalty of $1100 per violation.

The DOL lists of the Most Common Violations found in its Investigations, but, in my experience, penalties for wage and hour violations arise more commonly in the following situations:

·         Misclassification of a nonexempt employee as exempt and the resulting failure to pay overtime.

·         Misclassification of an employee as an independent contractor.

·         Failure to pay employees for all "hours worked".

·         Miscalculation of Overtime.

·         Docking exempt employee pay.

·         Automatically deducting for meal times.

·         Violations of Child Labor laws.

The financial impact of FLSA mistakes for one or two employees is not great. However, damages  add up quickly when an employer is facing a potential back pay for a larger group of employees going back two years and then doubling the number for liquidated damages.

Sometimes examples can better make a point. Employers can mismanage lunch periods by automatically deducting 30 minutes a day from employees’ pay. Employees may later allege they are working through lunch. For a group of twenty such employees, who are paid $12.00 per hour and who work only 40 hours per week, the mismanaged 30 minute lunch yields 2 ½ hours of unpaid overtime each week. That’s fifteen dollars of unpaid overtime a week, for 52 weeks, for 2 years, for 20 employees or a total back pay of $31,200.00. Then the amount is doubled for a grand total of $62,400.00.

It doesn’t take much for small errors to grow into big numbers. Imagine how huge bigger numbers can get. Take a look at Wal-Mart that lost a lawsuit in Pennsylvania and was required to pay $78.5 million to over 187,000 employees for overtime pay miscalculations based on off the clock work during breaks.