No in-house counsel wants to wake up one morning to discover the company has an unexpected and unfunded $3 million contingent liability. That can happen when a relatively small group of workers brings a collective action alleging the company owes them for overtime pay. I call these suits an overtime dog pile.
Overtime suits are common these days. People call the Department of Labor so often that the agency has a “Bridge to Justice” program that refers overtime claimants to private plaintiffs counsel. But companies and their counsel don’t have to take it lying down. Here are some steps the legal team can take to protect the business — before and after plaintiffs sue.
1. Examine pay policies now. No one wants to be an easy mark for an overtime collective action. If a suit challenges a policy that has never had a hard look, a company’s damages exposure can skyrocket. Before a DOL investigator or a process server shows up, the company’s legal department needs to check pay policies for overtime-claim hot spots.
Back wages over a two-year collection window are only the start — extra damages are at stake. A winning overtime plaintiff can get liquidated damages to double his back wages award unless the company proves “good faith” on the pay policy. If a plaintiff can prove the overtime violation was “willful,” the back-wages window extends from two to three years.
Audited policies stand the best chance of avoiding extra damages. An HR audit might be enough to avoid the damages if the HR auditor diligently studies the law. Relying on legal counsel typically is enough when counsel has looked at the pay policy that’s under fire.
2. Audit wisely. Working with limited audit resources, in-house counsel should carefully pick where to deploy them. Let’s look at a few pay policies that often can be ground zero for an overtime dog pile. The cleanest way to hedge against the risk of a court awarding damages that go beyond back wages is to arrange for an external pay-practice audit. As noted, an audited policy stands a good chance of avoiding being hit with liquidated damages for lack of good faith and willfulness.
Bonus plans for non-exempt workers can trigger liability for extra overtime pay. An overtime hour must be paid at 1.5 times the employee’s “regular hourly rate,” which includes more than hourly wages. Bonuses must be weighted into the rate unless they’re discretionary. A written bonus plan normally renders the bonus nondiscretionary because the plan makes promises about when a bonus is paid and how it’s calculated. If the employee’s overtime pay was based strictly on his hourly wage and he has ever received a bonus, he’s probably been shorted.
Independent contractors deserve special attention. The fault line between an employee who gets overtime pay and an independent contractor who does not is, at best, murky. It all comes down to the economic realities of the working relationship. An employee is economically dependent on the company; a contractor is not. Take, for example, a contractor who has worked full time for a company on a set daily rate for three years. Because he looks economically dependent on the company, he might actually be an employee.
Plaintiffs counsel love independent-contractor misclassification claims. So does the DOL. In fact, the DOL has inked a Memorandum of Understanding to team up with the Internal Revenue Service for a “Misclassification Initiative.” The agencies essentially share leads on companies whose contractor classifications look questionable.
Day rates also can get a company into trouble. Paying a flat day rate without satisfying the DOL’s detail-oriented regulations can destroy an employee’s overtime exemption. That’s bad news, especially in the oil field where day rates have cultural momentum.
3. Slice and dice the class. Brute numbers can pressure a company facing an overtime collective action. Representing a class of current and former employees, plaintiffs counsel often uses a class to demand eye-popping dollars. The alternative, class discovery, is expensive too. A legal department needs to know how to work the numbers in the company’s favor.
Defense counsel might carve down — or even break — the potential class. The overtime laws give a company two opportunities to do it: once early in the case when the plaintiff asks for conditional certification and again near the end of discovery when the court can decertify the class.
Federal courts expect all members of a collective action to be “similarly situated.” Some collective actions are vulnerable here. For example, a plaintiff might claim he was misclassified as salaried exempt and ask for a class of salaried employees working in several different jobs. But overtime exemptions depend largely on job duties. Because the class members work different jobs, it’s hard to say they’re all similarly situated.
An off-the-clock work collective action may struggle to get off the ground. The proposed class of non-exempt plaintiffs must show that they’re all similarly situated in working hours off the clock and their bosses looking the other way. That can be tough to prove when class members worked for many different bosses, so long as the company had policies against employees working off the clock or bosses allowing it.
4. Crunch the numbers right. Damages calculations need a skeptical eye. Plaintiff’s counsel normally bases a damages model on an overtime hour being paid at 1.5 times the regular hourly rate. Not so fast.
Some situations only warrant a .5 multiplier, which cuts damages by roughly two-thirds. Day-rate employees are one example. DOL regulations endorse half-time overtime pay for non-exempt workers who receive only a day rate for all hours worked during a day. Another example is employees who have been misclassified as salaried exempt. The 5th U.S. Circuit Court of Appeals historically has applied half-time damages when an employer mistakenly believes an employee was exempt. Some courts resolve damage models on summary judgment.
Yes, overtime suits feel like a dog pile. But solid preparation and defense can tip the scales.