Take steps to avoid throwing away money on "collective actions" brought under the Fair Labor Standards Act.
By Peter Brown and David Urban|August 08, 2006 at 12:00 AM
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Recent years have seen a rise in the number of lawsuits brought by employees against cities, counties and other public entities under the Fair Labor Standards Act. These actions, which are brought as “collective actions” specifically authorized by the FLSA, can impose substantial liability on public employers. Legal periodicals regularly report on private-sector wage-and-hour settlements and verdicts well into the tens of millions of dollars, sometimes over a hundred million. The FLSA applies to public-sector employers just as it does to those in the private sector, and presents the same magnitude of exposure. This article will describe the dangers of FLSA collective actions (why an organization’s liability can be so substantial), and how public employers can take steps to avoid such lawsuits. The FLSA among other things sets forth the minimum hourly wage an employer must pay its employees and requires employers to pay overtime compensation at not less than 1 1/2 times the regular rate for hours worked in excess of a specified number (usually 40 hours in a seven-day workweek). The act also contains requirements regarding record keeping and posting of notices, and prohibits retaliation against employees who assert claims. The FLSA allows employees to bring claims under the act on their own behalf. It also allows multiple employees to bring claims as part of a collective action in which each aggrieved employee becomes a party to the action. An employee can join the collective action if he or she is “similarly situated” with the plaintiffs, i.e., affected by the same “decision, policy or plan” challenged by the lawsuit. To join as a plaintiff, the employee must only execute a consent to join the action and provide it to plaintiffs’ counsel for filing. FLSA actions can threaten public-sector employers with high exposure, first, because the regular damages awarded can be substantial. An employer who mistakenly pays its employees improperly under the FLSA must pay appropriate back pay. The back award can apply to a whole class of employees, can constitute a substantial fraction of their wages, and can extend back several years. The statute of limitations for an FLSA action is two years, extended to three if the employer’s violation is “willful.” A violation is “willful” if an employer knew or showed reckless disregard as to whether its conduct was prohibited. An employer will also have to provide back pay for the time during which the lawsuit was pending (unless the employer changed its practices during that time). If a whole class of employees is part of the lawsuit, the back pay liability can add up quickly. What is more, the FLSA requires an employer to pay “liquidated damages,” typically in an amount equal to the back pay owed. The employer must pay such liquidated damages unless it can show it acted in “good faith.” To make this showing, the employer must prove that it had an honest intention to ascertain and follow the requirements of the FLSA and that it had reasonable grounds for believing its conduct complied with the act. Even an employer’s making this good-faith showing does not itself exempt the employer from liquidated damages � rather, it affords the court “discretion” to eliminate or reduce the liquidated damages. (Even though they effectively amount to double damages, liquidated damages are considered compensatory: as some point out, the award appears to assume that employees deprived of back wages would have earned a 100 percent return on investment of those funds.) Next, prevailing plaintiffs under the FLSA are entitled to an award of reasonable attorneys’ fees and court costs. This award could constitute a substantial additional liability for employers, first, because plaintiffs’ counsel’s rates in wage-and-hour cases are often high. Plaintiffs’ counsel can argue that their years of experience in such matters entitle them to hourly rates as high as $400 per hour or more. Also, the hours spent by plaintiffs’ counsel can be extensive, because collective actions can last a number of years and require both sides to engage in fact-intensive discovery and motion practice. Moreover, the award of fees, even if “reasonable” for purposes of applicable law, would not actually constitute a fee amount supported by the market (i.e., that clients would actually agree to pay the plaintiffs’ lawyers). Instead, it would constitute in effect another substantial liability to be borne by the employer. Finally, employers should not forget that willful FLSA violations can be criminally prosecuted. The penalty for a first offense can be up to $10,000, and imprisonment is possible for subsequent offenses. The following types of FLSA claims are being brought against public employers with some frequency: 1. Failure to Calculate Regular Rate of Pay: Cases often involve claims that employers pay overtime using the wrong rate of pay. Under the basic formula for calculating overtime pay, employees must be compensated for overtime hours at a rate of at least 1 1/2 times an employee’s “regular rate” of pay. This rate includes not only the employee’s base rate but also “all remuneration for employment paid to, or on behalf of, the employee” except for payments specifically excluded under the act. For example, employees may receive longevity pay, bilingual pay, educational incentive pay or other additional pay as part of their regular compensation, but the employer may have a practice of excluding such pay in computing overtime. Employees frequently challenge this type of practice under the FLSA. 2. “Suffer or Permit” Actions: The FLSA requires that if an employer “suffer[s]” or “ permit[s]” employees to work, the employer must compensate them. Courts have interpreted the foregoing phrase of the FLSA to mean that if an employer knows or should know an employee is or was working overtime, the employer must comply with the maximum hours provision of the statute. Cases arise involving these principles when, for example, management asks public employees to do work-related tasks while off-the-clock, such as preparing for court appearances, preparing reports or engaging in other types of tasks, without compensation or overtime pay. 3. Qualification for Overtime Exemptions: The FLSA includes full and partial exemptions from overtime. An example of a full exemption is that for executive, administrative or professional employees: the so-called “white collar” exemptions. An example of a partial exemption is that for employees engaged in “fire protection activities” � such employees are exempt from overtime requirements, but only until they work a certain extended period of time within a particular period, at which point the employer must pay overtime. Litigation frequently occurs regarding whether the actual job responsibilities and work of employees meet FLSA overtime exemption requirements. 4. Discrete FLSA Issues: Litigation also frequently involves miscellaneous discrete issues pertaining to the FLSA, including the timeliness of wage payments, an employer’s payment of compensatory time off, work schedule issues, whether types of time worked are de minimis and need not be paid, and other matters. Public employers (and private employers) can reduce the likelihood of FLSA collective actions, and the substantial exposure they present, by taking preliminary preventive measures. These include the following:
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