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GCs take note: Wage-and-hour litigation has risen dramatically over the past few years. The number of suits filed under the Fair Labor Standards Act (FLSA) increased by almost 25 percent between 1998 and 2000, according to the Administrative Office of the U.S. Courts. Specifically, the incidence of wage-and-hour collective or class actions has grown tremendously, doubling in a mere two years. Enacted in 1938 to govern minimum wage, overtime and child labor in the public and private sectors, FLSA clearly is being put to the test with the advent of the new millennium’s “virtual workplace.” But FLSA has not been amended to deal with the complexities of the way people work in the 21st century. Telecommuting employees and flexible scheduling arrangements are just a few of the employment innovations that fall under the scope of this rigid, antiquated statute. Yet the unprecedented increase in wage-and-hour class and collective actions and the immense verdicts resulting from these suits show that FLSA, despite its age, is still very much alive. FLSA suits can allege a variety of wage-and-hour law violations, including failure to identify and pay for all time worked accurately, improperly classifying managerial or other employers as exempt from the requirement of overtime pay, and requiring hourly, non-exempt employees to work “off the clock.” The improper classification of employees is the most common and costly mistake made by employers. FLSA requires that employees working more than 40 hours per week be compensated at a rate of 1 1/2 times their regular wage. But executive, administrative and professional employees are exempt from FLSA’s overtime provisions. Generally, for employees to be classified as executive, administrative or professional — and therefore exempt from overtime requirements — their duties must fit FLSA’s test, and they must be paid on a salary basis, earning at least $250 a week. WAGE AND HOUR LAW While individual employees generally have relatively small claims for unpaid overtime and/or other wages, the effect of these plaintiffs forming nationwide class actions can be disastrous for most employers. For example, one California jury in 2001 awarded $90 million to a class of 2,400 insurance claims adjusters alleging denial of overtime pay in Bell v. Farmers Insurance Exchange, and the finding was affirmed by the 4th Court of Appeals in California. In awarding $88.7 million in time-and-a-half pay and $1.2 million for double-time pay, this jury obviously caught the attention of California employees, as several multimillion-dollar suits with ongoing litigation and pricey settlements have since erupted. Farmers Insurance Exchange isn’t a lone case study — high verdicts similar to those obtained in the case against it attracted plaintiffs like moths to a flame. Defendants to FLSA class actions for unpaid overtime have, in recent years, included such companies as Pepsi-Cola, Sbarro, Enterprise Rent-A-Car and Longs Drug Stores. Wal-Mart alone has 28 separate suits pending against it. Employers legitimately are concerned as wage-and-hour class and collective actions result in multimillion-dollar verdicts, which include backpay, interest, penalties and attorney fees. For employers who conduct business in numerous states, they should also be concerned about state-specific wage and hour laws. For example, California has a more stringent exemption requirement, and many employees who meet the exemption under federal law are considered non-exempt under California law. There is a significant industry of attorneys seeking to represent individuals in potential class actions in California. Settlements of state claims include Pacific Bell paying $35 million to its engineers and $27 million to its sales managers; Starbucks Coffee Co. settling for $18 million with store managers; Payless Shoe Source settling for $4 million with store mangers; and Taco Bell paying $9 million in 2001 after paying $2.8 million in 1997. Media coverage of these alarming verdicts has triggered an onslaught of cases against every type of employer by employees discovering their rights or potential rights. In Moschin Mynaf, et al. v. Taco Bell Corp., filed in the Superior Court for Santa Clara County, Calif., 3,000 current and former managers and assistant general managers for Taco Bell’s fast-food chain filed a complaint under California law, alleging that the company misclassified them as executives to avoid compensating them for overtime labor. According to the complaint, the plaintiffs alleged that, despite their classification as managers, they spent most of their time performing the same work as rank and file crew employees. After three weeks in trial, Taco Bell settled in 2000 for $9 million plus attorney fees and litigation expenses. That same year, Payless Shoe Source settled Leoncio Martins, et al. v. Payless Shoe Source Inc., which was brought by a class of salaried employees allegedly classified by the company as store managers. After a 14-hour mediation session, the company paid $2.64 million to class members, $80,000 for class enhancements ($20,000 per each class representative) and $1.2 million in attorney fees, according to the Westlaw settlement database. The plaintiffs’ argument — that they were not given discretionary duties or supervisory roles despite their managerial titles — was similar to that made by the plaintiffs in the Taco Bell case and in the great majority of overtime class action suits. The Payless plaintiffs further alleged that the company intentionally misclassified them to save millions of dollars in payroll and taxes and disseminated false information throughout its retail stores, reciting that salaried employees were not entitled to overtime pay under California law, according to the Westlaw settlement database. NOWHERE TO HIDE Fortune 500 companies are not the only ones hit with wage-and-hour class actions. Medium-sized and smaller companies are just as susceptible — and often even more vulnerable to the high cost of litigation. The penalties alone can be staggering. Take an employee earning $500 per week who worked 50 hours a week for three years. A mere 10 hours of overtime per week can add up to over $45,000 per employee if a court finds a willful violation of the law and doubles the unpaid overtime. It takes only one employee to file a complaint with the U.S. Department of Labor or a state labor department and initiate an investigation. Multiplying that employee’s claim to include an entire shift or class of workers can lead to an employer’s financial devastation. Wage-and-hour “class actions” filed under FLSA, 29 U.S.C. � 216(b), are technically called “collective actions,” while true class actions are those filed under state labor laws. Under � 216(b), similarly situated plaintiffs can join together in a collective action to recover backpay and liquidated damages. In a collective action, plaintiffs are required to “opt in,” or affirmatively indicate their intent to participate in the action, whereas the true class action under Federal Rule of Civil Procedure 23 has no such requirement. Rather, litigation in a Rule 23 class action has a preclusive effect on the claims of a class of plaintiffs unless they “opt out” of the action. Most courts have held that the Rule 23 requirements of “commonality,” “typicality,” “numerosity” and “adequacy of representation” do not apply to FLSA collective actions. Instead, FLSA plaintiffs need only make a minimal, preliminary showing that they are “similarly situated” with a class of other potential plaintiffs. Employers should also be alert to U.S. Department of Labor audits of wage-and-hour issues and recognize that when the DOL brings a statutory class action claim against an employer, it seeks injunctive relief and back wages for all employees within the statutory class. Sometimes, the scope of these class actions exceeds the scope of the original investigation, seeking regional or nationwide relief. But companies aren’t powerless to prevent FLSA actions. It is the responsibility of all general counsel to ensure their companies take vigilant and proactive approaches to their pay structures and overtime pay issues to avoid falling prey to FLSA class actions. An important first step is determining whether the company is exposed to FLSA liability. Many companies may find the best way to do this is by hiring an attorney who specializes in labor and employment issues to conduct a private audit of workplace and payroll practices to ensure compliance with federal and state wage-and-hour laws. Such an audit will generally include a review of actual duties performed by individuals to determine whether they fit within the exemption as well as a review of payroll practices to ensure that overtime is properly calculated. Companies should also consider periodic self-audits of their payroll processes as well as conduct reviews of job descriptions on a more regular basis. While few companies relish the additional legal expenses that come with hiring lawyers and/or internal manpower costs to conduct audits and reviews, these costs are clearly minimal when compared to the substantial financial risks that can arise from from a Depression-era law called the Fair Labor Standards Act. Ron Gaswirth heads the labor and employment section at Gardere Wynne Sewell (www.gardere.com)in Dallas and is a former regional solicitor of the U.S. Department of Labor. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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