AN INTRODUCTION TO EMPLOYMENT LAW:
WHY YOU SHOULD BE CONCERNED
TEXAS LAWYER’S IN-HOUSE COUNSEL SUMMIT
MAY 17, 2012
Daniel D. Pipitone
Jacqueline T. Coyne
1200 Smith Street, 14th Floor
Houston, Texas 77002
Telephone: (713) 654-9637
daniel.pipitone@chamberlainlaw.com
jacqueline.coyne@chamberlainlaw.com
AN INTRODUCTION TO EMPLOYMENT LAW: WHY YOU SHOULD BE CONCERNED
Current trends in litigation indicate that employment law issues, especially those related
to the Fair Labor Standards Act (“FLSA”), are of increasing concern to employers. In fact, FLSA
lawsuits have recently been described as one of the “fastest growing areas of litigation.”1 This is
likely due the August 23, 2004 revisions to the FLSA,2 as well as a strategic crackdown on
employers by the Wage & Hour Division of the Department of Labor (“DOL”) for the
misclassification of employees.3
Between 2010 and 2011, the number of wage and hour lawsuits filed in federal court has
increased by 15%.4 Since 2008, the number has increased by 32%.5 Already, between January 1
and March 31 of this year, over 200 employment law cases have been filed in the Southern
District of Texas alone that remain active, with at least 100 of them alleging FLSA violations by
employers.6
These statistics should be of particular concern to employers, as the penalties for
violations of the FLSA can include back wages and overtime, liquidated damages, attorney’s
fees, fines, and court costs.7 The value of settlements in these wage and hour lawsuits has been
rising as well. In 2009, the value of the top ten private settlements totaled $363.6 million,
1
Christopher M. Pardo, The Cost of Doing Business: Mitigating Increasing Recession Wage and Hour Risks While
Promoting Economic Recovery, 10 J. BUS. & SEN. L. 1, 9 (2009-2010).
2
Id.
3
See Bob Lian, The Potential Impact of the Obama Administration on the Labor and Employment Legal Landscape,
Akim GUMP STRAUSS HAUER & FELD, LLP, Nov. 11, 2008, at ¶1, available at
http://washlaborwire.com/2008/11/11/the-potential-impact-of-the-obama-administration-on-the-labor-andemployment-legal-landscape-3/; U.S. DEP’T OF LABOR, STRATEGIC PLAN, FISCAL YEARS 2011-2016 (2010).
4
Christian Schappel, 6 top reasons wage-and-hour lawsuits are climbing rapidly, HRMORNING.COM, April 17,
2012, at ¶2, available at http://www.hrmorning.com/6-top-reasons-wage-and-hour-lawsuits-climbing/.
5
Paul Davidson, More American Workers Sue Employers for Overtime Pay, USA TODAY, April 15, 2012, at ¶2,
available
at
http://www.usatoday.com/money/jobcenter/workplace/story/2012-04-15/workers-sue-unpaidovertime/54301774/1.
6
Public Access to Court Electronic Records (PACER) Database, available at www.pacer.gov.
7
29 U.S.C. § 216(b) (2011).
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increasing nearly 44% from the 2008 value.8 In addition to these penalties, employers can be
potentially subjected to government audits and tax penalties as a result of a DOL investigation.
Further, the FLSA allows for one or more employees to file a “collective action,” which is in
essence a special type of class action lawsuit where other employees can elect to “opt in” to the
suit.9
Accordingly, it is imperative that employers understand the basic provisions of the FLSA
so that they can correctly classify employees, implement company policies to reduce the risk of
inadvertent violations of the law, and effectively navigate any DOL investigation or FLSA
litigation that may occur.
FLSA BASICS: WHAT YOU NEED TO KNOW
The FLSA creates a standard guide for employers to follow by establishing minimumwage, overtime pay, record keeping, and child labor standards for both full and part-time
workers.10 Although the functions and protections of the FLSA are broad, the most pressing
issues for both employers and their workers are those relating to minimum wage and overtime
pay. These two issues form the basis for most wage and hour claims, which constitute the bulk of
FLSA litigation.
Under the FLSA, employers must pay employees no less than the federal minimum wage,
which is currently $7.25 for all hours worked in a workweek.11 A workweek is defined as “a
fixed and regularly recurring period of 168 hours—seven consecutive 24-hour periods. It need
not coincide with the calendar week but may begin on any day and at any hour of the day.”12
8
Martha Lynn Craver, Wage and Hour Lawsuits Costing Employers Millions, THE KIPLING LETTER, February 22,
2010, at ¶2, available at http://www.kiplinger.com/businessresource/forecast/archive/wage-and-hour-lawsuitscosting-employers-millions.html.
9
29 U.S.C. § 216(b).
10
See 29 U.S.C. §§ 206, 207, 211(c), 212.
11
Id. at § 206(a)(1)(C).
12
29 C.F.R. § 778.105 (2010).
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Overtime compensation for all hours worked over 40 in a workweek must be at least 1.5 times
the employee’s regular rate of pay.13
In order to incur liability under the FLSA for minimum-wage and overtime violations, an
employer-employee relationship must first exist.14 The FLSA defines an employee as an
individual that is “employed by an employer.”15 In order to be employed, the individual must
“suffer or [be permitted] to work.”16 Clearly, these definitions provide employers with little
guidance as to how to classify their workers, and much litigation has ensued as a result of their
ambiguity and “striking breadth.”17
To further complicate the issue for employers, the FLSA exempts certain classes of
employees from these overtime requirements.18 In order to be classified as an exempt employee,
the employee must receive a total compensation of at least $455 per week on a salary or fee
basis.19 Further, the employee must fall within the FLSA’s list of exempted employee classes,
which include executive, administrative, professional, computer, and outside sales employees.20
Each of these terms is defined by the DOL.21
Penalties for noncompliance with the FLSA can be very problematic for employers. The
FLSA defines an employer as “any person acting directly or indirectly in the interest of an
employer in relation to an employee.”22 A person is defined as “an individual, partnership,
association, corporation, business trust, legal representative, or any organized group of
13
Id. at § 207(a)(1).
Id. at § 216(b).
15
Id. at § 203(e).
16
Id. at § 203(g).
17
Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326 (1992). See also Richard J. Burch, A Practitioner’s Guide
to Joint Employer Liability Under the FLSA, 2 HOUS. BUS. & TAX J. 393, 402–03 (2002).
18
See 29 U.S.C. § 213.
19
29 C.F.R. § 541.600(a) (2005).
20
See 29 U.S.C. § 213(a).
21
Id.
22
Id. at 203(d).
14
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persons.”23 Thus, in addition to a business organization, individuals can be held personally liable
for FLSA violations, and multiple circuits have determined that the FLSA definition of an
employer can even include corporate officers with economic or operational control.24
FLSA penalties are severe, and include:
(1) Back Pay. Back pay is equal to the difference between the amount the employee was
paid and the amount that he or she should have been paid by the employer, including
the minimum hourly wage as well as overtime.25
(2) Liquidated Damages. Liquidated damages may be recovered in addition to back pay
in an amount equal to the back pay award unless the company can establish that it had
a good faith belief that its pay practices complied with the FLSA. 26 A court may deny
or reduce liquidated damages if the employer proves that it (1) had a subjective good
faith belief that it was not violating the FLSA; and (2) the employer’s belief was
reasonable.27
(3) Attorney’s Fees and Court Costs. Employees who prevail can recover attorney’s
fees and court costs.28
(4) Fines and Imprisonment. Employers who have willfully violated the FLSA are
subject to fines of up to $10,000. If the employer repeatedly violates the FLSA, he or
she can also be subject to up to six months of imprisonment.29
Employees have up to two years to seek recovery of back pay, and they have up to three years if
the violation is willful.30 They can also file a “collective action,” which amounts to a class action
suit in which other employees can “opt in” to the lawsuit.31 These collective actions can quickly
add up to very steep penalties for employers, as claims by multiple employees can be aggregated
into one. For example, in 2009, Wal-Mart settled a collective action in California for $86
23
Id. at 203(a).
See, e.g., Chao v. Hotel Oasis, Inc. 493 F.3d 26, 34 (1st Cir. 2007); Boucher v. Shaw, 573 F.3d 1087, 1091 (9th
Cir. 2009).
25
29 U.S.C. § 216(b).
26
Id. at §§ 216(b), 259.
27
See Id. at § 259.
28
Id. at § 216(b).
29
Id. at § 216(a).
30
Id. at § 255(a).
31
Id. at § 216(b).
24
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million, which was brought by 232,000 current and former employees who alleged that WalMart had failed to pay them vacation, overtime, and other wages.32
Not surprisingly, most FLSA compliance and litigation issues for employers arise within
this FLSA framework. Such issues generally result from: (1) the misclassification of a worker as
an independent contractor, rather than an employee subject to the FLSA; (2) the misclassification
of employees as exempt or non-exempt; and (3) the failure of employers to pay non-exempt
employees for time actually worked. Accordingly, each of these subjects will be discussed in
greater depth below.
MISCLASSIFICATION OF WORKERS
The misclassification of workers as independent contractors, when they qualify as
employees, and as exempt employees, when they are actually non-exempt employees, are two of
the largest wage and hour issues currently facing employers. The tests used to determine the
worker’s status are both vague and complicated, and as outlined above, the penalties for
misclassification can be severe. Thus, a basic understanding of the classification of workers by
employers is imperative to ensure proper compliance with the FLSA.
A.
EMPLOYEE VS. INDEPENDENT CONTRACTOR
To determine a worker’s status as an employee or an independent contractor for purposes
of the FLSA, the DOL uses the “economic realities” test.33 Under this test “[w]here the work
done, in its essence, follows the usual path of an employee, putting on an ‘independent
contractor’ label does not take the worker from the protection of the [FLSA].”34 Thus, whether a
32
See, e.g., Wal-Mart in $86 million settlement of wage lawsuit, REUTERS, May 12, 2010, at ¶1–2, available at
http://www.reuters.com/article/2010/05/12/us-walmart-lawsuit-settlementidUSTRE64B3MG20100512?type=domesticNews.
33
U.S. DEP’T OF LABOR, WAGE AND HOUR DIVISION, FACT SHEET #13: EMPLOYMENT RELATIONSHIP UNDER THE
FAIR LABOR STANDARDS ACT (FLSA) (2009).
34
Rutherford Food Corp. v. McComb, 331 U.S. 772, 779 (1947).
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worker is actually an employee depends upon the “economic reality” of the situation.35 To help
in this determination, the DOL has published a set of factors to assist employers in determining
whether an employee is an independent contractor.36 These factors include:
(1) The extent to which the services rendered are an integral part of the employer’s
business;
(2) The permanency of the relationship;
(3) The amount of the worker’s investment in facilities and equipment;
(4) The nature and degree of control by the employer;
(5) The worker’s opportunities for profit and loss;
(6) The amount of initiative, judgment, or foresight in open market competition with
others required for the success of the worker; and
(7) The degree of independent business organization and operation.37
No single factor is determinative;38 rather, one must “evaluate the totality of the circumstances,
focusing on the economic realities of the particular employment relationship.”39
It is important to note that the Internal Revenue Service (“IRS”) and the DOL use similar,
but different, tests to determine whether a worker is an employee. This is important because
incorrect classification of an employee as an independent contractor may result in employers
being held liable for employment taxes for that worker40 as well as costly health insurance
ramifications. Employers must generally withhold federal income taxes, withhold and pay social
U.S. DEP’T OF LABOR, WAGE AND HOUR DIVISION, FACT SHEET #13: EMPLOYMENT RELATIONSHIP UNDER THE
FAIR LABOR STANDARDS ACT (FLSA) (2009).
36
Id.
37
Id.
38
Id.
39
Reich v. Priba Corp., 890 F. Supp. 586, 590 (N.D. Tex. 1995).
40
See INTERNAL REVENUE SERVICE PUBLICATION, INDEPENDENT CONTRACTOR (SELF-EMPLOYED) OR EMPLOYEE?
(2012), available at http://www.irs.gov/businesses/small/article/0,,id=99921,00.html; I.R.C. § 3509 (2012).
35
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security and Medicare taxes, and pay unemployment tax on wages paid to an employee. 41 By
contrast, an employer does not generally have to withhold or pay any federal taxes on payments
to independent contractors.42
Further, employers are increasingly concerned with the classification of workers as
independent contractors due to the recent passage of the Patient Protection and Affordable Care
Act, better known as ObamaCare.43 Under ObamaCare, which is set to take effect on January 1,
2014, employers with 50 or more full-time employees are obligated to provide health insurance
coverage to full-time employees, but not to drivers who meet the IRS independent contractor test
or part-time employees.44 Should an employer not offer a health care plan to its employees, it
will be penalized if at least one of the employer’s full-time employees takes a government
subsidy to buy coverage on his/her own.45 This penalty amounts to the lesser of $3,000 for each
employee who obtains subsidized coverage, or $2,000 for each full-time employee beyond the
first 30, which are automatically excluded.46 Notably, the term “full-time employee” is defined
as an employee who is employed on average at least 30 hours of service per week.47 As such,
proper classification of workers as independent contractors is a key concern for employers.
It is important to note that the test used by the IRS to distinguish independent contractors
from employees has recently changed from the “right to control” test, which considered a set of
20 factors, to a more simplified test which considers three characteristics to determine the
See INTERNAL REVENUE SERVICE PUBLICATION 15-A, EMPLOYER’S SUPPLEMENTAL TAX 2012 Edition, page 7,
available at http://www.irs.gov/pub/irs-pdf/p15a.pdf.
42
Id.
43
See, e.g., John W. Hazard & Sarah Mooney, What does the Health Care Act Mean for Independent Contractors
and Employers?, INDEPENDENT ASSOCIATION OF BUSINESS, April 14, 2010, at ¶5, available at
http://iabusa.wordpress.com/2010/04/14/what-does-the-health-care-act-mean-for-independent-contractors-andemployers/.
44
Id.
45
Id.
46
Id.
47
Id.
41
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relationships between workers and employers.48 Under the new IRS test, the IRS will consider an
employer’s behavioral and financial control over a worker as well as the type of relationship
between the parties.49 This new IRS test is set forth as follows:
(1) Behavioral Control
a. Instructions the business gives the worker. An employee is generally subject
to the business' instructions about when, where, and how to work. All of the
following are examples of types of instructions about how to do work:
i. When and where to do the work
ii. What tools or equipment to use
iii. What workers to hire or to assist with the work
iv. Where to purchase supplies and services
v. What work must be performed by a specified individual
vi. What order or sequence to follow
The amount of instruction needed varies among different jobs. Even if no
instructions are given, sufficient behavioral control may exist if the employer
has the right to control how the work results are achieved. A business may
lack the knowledge to instruct some highly specialized professionals; in other
cases, the task may require little or no instruction. The key consideration is
whether the business has retained the right to control the details of a worker's
performance or instead has given up that right.
b. Training the business gives the worker. An employee may be trained to
perform services in a particular manner. Independent contractors ordinarily
use their own methods.
(2) Financial Control
a. Facts that show whether the business has a right to control the business
aspects of the worker's job include:
i. The extent to which the worker has unreimbursed business expenses.
Independent contractors are more likely to have unreimbursed
expenses than are employees. Fixed ongoing costs that are incurred
48
49
INTERNAL REVENUE SERVICE PUBLICATION 15-A, EMPLOYER’S SUPPLEMENTAL TAX 2012 Edition, page 7.
Id.
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regardless of whether work is currently being performed are especially
important. However, employees may also incur unreimbursed
expenses in connection with the services they perform for their
business.
ii. The extent of the worker's investment. An employee usually has no
investment in the work other than his or her own time. An independent
contractor often has a significant investment in the facilities he or she
uses in performing services for someone else. However, a significant
investment is not necessary for independent contractor status.
iii. The extent to which the worker makes services available to the
relevant market. An independent contractor is generally free to seek
out business opportunities. Independent contractors often advertise,
maintain a visible business location, and are available to work in the
relevant market.
iv. How the business pays the worker. An employee is generally
guaranteed a regular wage amount for an hourly, weekly, or other
period of time. This usually indicates that a worker is an employee,
even when the wage or salary is supplemented by a commission. An
independent contractor is usually paid by a flat fee for the job.
However, it is common in some professions, such as law, to pay
independent contractors hourly.
v. The extent to which the worker can realize a profit or loss. Since an
employer usually provides employees a workplace, tools, materials,
equipment, and supplies needed for the work, and generally pays the
costs of doing business, employees do not have an opportunity to make
a profit or loss. An independent contractor can make a profit or loss.
(3) Relationship Between the Parties
a. Facts that show the parties' type of relationship include:
i. Written contracts describing the relationship the parties intended to
create. This is probably the least important of the criteria, since what
really matters is the nature of the underlying work relationship, not
what the parties choose to call it. However, in close cases, the written
contract can make a difference.
ii. Whether the business provides the worker with employee-type benefits,
such as insurance, a pension plan, vacation pay, or sick pay. The
power to grant benefits carries with it the power to take them away,
which is a power generally exercised by employers over employees. A
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true independent contractor will finance his or her own benefits out of
the overall profits of the enterprise.
iii. The permanency of the relationship. If the company engages a worker
with the expectation that the relationship will continue indefinitely,
rather than for a specific project or period, this is generally considered
evidence that the intent was to create an employer-employee
relationship.
iv. The extent to which services performed by the worker are a key aspect
of the regular business of the company. If a worker provides services
that are a key aspect of the company's regular business activity, it is
more likely that the company will have the right to direct and control
his or her activities. For example, if a law firm hires an attorney, it is
likely that it will present the attorney's work as its own and would
have the right to control or direct that work. This would indicate an
employer-employee relationship.50
Accordingly, whether under the DOL test or the IRS test, the classification of a worker as
an independent contractor, rather than an employee, does not depend on the worker’s title.
Instead, the employer must consider its overall relationship with and control over the worker, and
establish clear agreements and company policies with regard to his or her independent
contractors. Thus, employers should:
(1) Execute and abide by an independent contractor agreement. The following terms
should be included in the agreement:
a. Lack of control by the company over the means by which the worker performs
his or her duties;
b. The term of the agreement (employers should complete a new agreement for
each term);
c. The intent of both parties that the worker is an independent contractor;
d. A requirement that the worker uses his or her own equipment or tools;
e. A statement that the worker may perform services for other businesses;
f. The ability of the worker to assign tasks to others;
50
Id.
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g. An agreement that the worker provide his or her own workers’ compensation
insurance, unemployment insurance, and liability insurance;
h. An acknowledgment that the worker is ineligible for employee benefits; and
i. A requirement that the worker has his or her own tax identification number.
(2) Require independent contractors to be incorporated and have business cards.
(3) Insist on invoices for work done.
(4) Allow workers the opportunity for profit or loss.
a. If a contracting company supplies workers, the contracting company should
have the opportunity for profit or loss depending on the quality of the work
performed.
b. The contracting company should have exclusive control over promoting,
demoting, or changing the pay of its employees.
(5) Have workers perform work off the premises.
(6) Do not hire independent contractors to perform an integral function of the business’s
functions.
(7) If a contracting company is used, the employer should not control the rate and method
of payment to workers.
(8) Do not maintain employment records of independent contractors. If there is a
contracting company, it is responsible for maintenance of employment records.
However, conducting an audit is permissible.
(9) Do not have permanent relationships with contractors.
(10) Do not retain the workers as independent contractors after terminating their
employment relationship. That is, the employer should not lay off or terminate an
employee and then hire him or her back as an independent contractor if he or she is
performing the same job.
By taking these steps, employers can drastically reduce, if not eliminate, FLSA and IRS liability
for improperly classifying their employees as independent contractors.
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B.
EXEMPT VS. NON-EXEMPT
Even if a worker is properly classified as an employee instead of an independent
contractor, FLSA issues can still arise with regard to whether an employee is classified as
exempt or non-exempt. These misclassification issues are of particular concern due to the DOL’s
recent strategic plan to target worker misclassification as a top priority through 2016.51
Ultimately, employers are not required to meet the FLSA minimum-wage and overtime
requirements for exempt employees,52 and therefore such classification is of high priority to
employers.
The fact that an employee is salaried does not necessarily mean that the employee is
exempt. Rather, the classification of employees as exempt depends on satisfying two separate
tests. First, the employee must satisfy the Salary Basis Test.53 Under the Salary Basis Test, the
employee must receive a total compensation of at least $455 per week on salary or fee basis.54
The employee’s compensation must be a predetermined amount, and cannot be subject to a
reduction due to variations in the quantity or quality work.55 Thus, employees must receive their
entire salary for any week in which they perform work, regardless of the number of days or hours
worked, in an amount that totals at least $455 per week. However, they do not need to be paid for
any workweek in which they perform no work.56
If the employee meets the Salary Basis Test, he or she must then fall within one of the
statutory exemption categories in order to be considered an exempt employee.57 The most
U.S. DEP’T OF LABOR, STRATEGIC PLAN, FISCAL YEARS 2011-2016 (2010).
See 29 U.S.C. § 213.
53
See 29 C.F.R. § 541.600(a) (2005). See also Sean N. McLaughlin, Controlling Smart-Phone Abuse: The Fair
Labor Standards Act’s Definition of “Work” in Non-exempt Employee Claims for Overtime, 58 U. KAN. L. REV.
737, 742 (2009–2010) (discussing the salary basis test).
54
Id.
55
29 C.F.R. § 541.602 (2005).
56
Id.
57
See 29 U.S.C. § 213(a).
51
52
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commonly exempted employees include those employees whose job duties qualify them as bona
fide executive, administrative, professional or outside sales employees, as defined by the DOL.58
For example, in order to qualify under the FLSA as an executive employee:
(1) The employee’s “primary duty must be managing the enterprise, or managing
a customarily recognized department or subdivision of the enterprise;”
(2) The employee “must customarily and regularly direct the work of at least two
or more other full-time employees or their equivalent;” and
(3) The employee “must have the authority to hire or fire other employees, or the
employees suggestions or recommendations as to the hiring, firing,
advancement, promotion, or any other change of status of other employees
must be given particular weight.”59
Computer and highly compensated employees may also qualify as exempt, provided that
additional requirements are met.60
Ultimately, classification of an employee as exempt relies not merely on the existence of
a salary, but is instead determined by the amount of the employee’s salary as well as the job
duties performed by the employee. It is important to remember that employers bear the burden of
proving that a particular employee falls within a certain exemption.61 Thus, regular reviews of
employees’ duties and the DOL’s definitions, as well as the maintenance of current and accurate
job descriptions, are necessary in order to ensure compliance with the FLSA.
As such, there are steps an employer can take to avoid the misclassification of employees.
Employers should:
(1) Remember that job titles alone are not determinative of an employee’s exempt status.
Rather, it is necessary to review employees’ duties and the FLSA’s definitions when
establishing these exemptions.
58
Id.
U.S. DEP’T OF LABOR, WAGE AND HOUR DIVISION, FACT SHEET #17B: EXEMPTION FOR EXECUTIVE EMPLOYEES
UNDER THE FAIR LABOR STANDARDS ACT (FLSA) (2008).
60
Id.
61
See Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S. 190. 209 (1996).
59
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(2) Remember that the employer has the burden of establishing an exemption. Thus:
a. An employer must keep current and accurate job descriptions; and
b. Performance reviews should accurately reflect these job descriptions.
(3) Properly apply exempt classifications to employees.
(4) Establish and enforce clear written policies concerning overtime, work schedules, and
hours worked.
(5) Maintain accurate record keeping.
(6) Conduct regular self-audits.
FAILURE TO PAY NON-EXEMPT EMPLOYEES FOR TIME ACTUALLY WORKED
In addition to misclassification issues relating to workers, many FLSA issues arise out of
employers’ failure to pay non-exempt employees for time actually worked. Such failures can be
intentional or unintentional; however in either event, the penalties can be stiff.62 Employers are
particularly vulnerable to such FLSA violations because although an employer may be aware
that he or she must pay employees overtime, knowing when an employee has worked over the
40-hour workweek can be onerous. This is because employees routinely perform tasks outside of
their normal working hours and/or away from their usual job site, making the calculation of time
actually worked by employers both uncertain and difficult.63
An employer is required to compensate a non-exempt employee for any work performed
by the employee if the employer has actual or constructive knowledge that work is being
performed, regardless of when or where it occurs.64 An employer’s knowledge is a question of
fact to be determined on a case-by-case basis.65 However, the FLSA provides no definition of
62
See 29 U.S.C. § 216.
See generally Jana M. Luttenegger, Smartphones: Increasing Productivity, Creating Overtime Liability, 36 J.
CORP. L. 259, 266 (2010-2011).
64
See 29 C.F.R. § 785.12 (2009); LUTTENGER, supra note 52 at 268–69.
65
Reich v. Dep’t of Conservation & Natural Res., 28 F.3d 1076, 1083 (11th Cir. 1994).
63
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“work,”66 leaving employers uncertain as to which activities performed by employees outside of
their normal working hours or job site constitute compensable work.
The Supreme Court has defined work with regards to the FLSA as “physical or mental
exertion (whether burdensome or not) controlled or required by the employer and pursued
necessarily and primarily for the benefit of the employer and his business.”67 Within this
definition, the Supreme Court has included worked performed while an employee is off-duty, so
long as the work is “an integral and indispensable part of the [employee’s] principal activities.”68
As such, courts consider three factors when considering if the employee’s off-duty activities
constitute compensable work:
(1) Whether the employer required or suffered the employees to perform the duties;
(2) How much of the off-duty work was performed necessarily and primarily for the
benefit of the employer; and
(3) Whether the off-duty work was an integral and indispensable part of the employer’s
activities for which the employee was hired.69
Ultimately, it is necessary to look to the totality of the circumstances.70
Making recordkeeping even more complicated, employers can disregard insubstantial or
insignificant periods of time worked beyond the scheduled working hours that cannot, as a
practical administrative matter, be precisely recorded for payroll purposes.71 Known as the de
minimis doctrine,72 this rule applies only where there are uncertain and indefinite periods of time
66
See MCLAUGHLIN, supra note 42 at 742.
Tenn. Coal, Iron, & R.R. v. Muscoda Local, 321 U.S. 590, 599 (1944).
68
Steiner v. Mitchell, 350 U.S. 247, 256 (1956).
69
Brock v. City of Cincinnati, 236 F.3d 793, 801 (6th Cir. 2001). See also MCLAUGHLIN, supra note 40 at 743.
70
Holzapfel v. Town of Newburgh, NY, 145 F.3d 516, 524 (2d Cir. 1998).
71
29 C.F.R. § 785.47 (2009).
72
See, e.g. MCLAUGHLIN, supra note 42 at 774.
67
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involved of a few seconds or minutes duration, and where the failure to count such time is due to
considerations justified by industrial realities.73
This can be problematic because time that is de minimis on a daily basis can be
aggregated to form compensable work under the FLSA, and can therefore lead to substantial
claims against employers by employees.74 As such, when determining whether the time worked
by an employee is de minimis, three factors must be considered:
(1) The practical administrative difficulty of recording the additional time;
(2) The aggregate amount of compensable time; and
(3) The regularity of the additional work.75
Accordingly, employers are faced with the challenge of accurately keeping track of their
employee’s time in a manner that is administratively efficient, while still complying with the
FLSA. Notably, this issue has been of paramount concern for employers over the past few years,
due to the skyrocketing usage of smart-phones at home and elsewhere during off-duty time
periods to check emails and otherwise conduct work by employees.76 Accordingly, there are
several important steps that employers should take to reduce potential FLSA liability for failure
to pay non-exempt employees for time actually worked. These steps include:
(1) Requiring employees to enter into contracts explicitly setting forth:
a. Company overtime policies; and
b. Policies related to smart-phone usage.
(2) Creating and strictly enforcing clear office policies prohibiting employees from
working overtime without first obtaining permission.
73
29 C.F.R. § 785.47.
See, e.g. Rutti v. Lojack Corp., 596 F.3d 1046, 1057 (9th Cir. 2010).
75
Lindow v. United States, 738 F.3d 1057, 1063 (9th Cir. 1984).
76
See, e.g. MCLAUGHLIN, supra note 42; LUTTENGER, supra note 52.
74
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(3) Creating and strictly enforcing clear office policies regarding smart-phone usage that
clarify:
a. How the employer wants the employee to use smart-phones;
b. The specific times that smart-phone usage is acceptable; and
c. The employer’s expectations for responding to calls and emails received after
regular work hours.
(4) Creating guidelines for how to properly record off-duty assignments and smart-phone
usage.
(5) If possible, implementing a time-keeping system to track the time employees are
remotely logged into the company email system.
(6) Maintaining strict time-keeping records.
By taking these steps, employers can drastically reduce FLSA liability for failure to pay nonexempt employees for time actually worked.
WHAT YOU CAN DO IF THERE IS A FLSA INVESTIGATION
Despite the many preventative steps employers can take, it is still possible that the DOL
will end up investigating an employer. This is because DOL investigations can result from:
(1) Random labor audits;
(2) Past violations;
(3) Complaints by disgruntled ex-employees;
(4) IRS audits; and
(5) Requests for unemployment benefits or worker’s compensation.
Ultimately, a DOL investigation will entail an initial interview with the employer, an inspection
of records, employee interviews, and after completion of the fact-finding stage by the
investigator, a final conference with the employer.
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Should an employer find itself under investigation by the DOL, there are steps that an
employer needs to take to protect himself. First and foremost, the employer should immediately
hire legal counsel to advise it of its rights and responsibilities. During an investigation, the DOL
will seek data concerning wages, hours, and other employment practices, and has subpoena
power to inspect an employer’s premises, inspect records, and conduct employee interviews. As
such, it is imperative to hire legal counsel to interact with the investigator, be present when
managers are interviewed by the investigator, and review all documents before they are disclosed
to the DOL.
Additionally, an employer should adequately prepare for the investigation by maintaining
proper records. The DOL requires that employers retain specific records, including those that
contain:
(1) Personal information;
(2) The hour and day when the workweek begins;
(3) The total daily or weekly straight-time earnings;
(4) The regular hourly pay rate for any week when overtime is worked;
(5) The total overtime pay for the workweek;
(6) Deductions from or additions to wages;
(7) Total wages paid each pay period; and
(8) The date of payment and periods covered.77
ATTACKING A FLSA INVESTIGATION
Should the DOL nevertheless issue a finding against an employer for a violation of the
FLSA, recent case law indicates that employers have the ability to charge forward and protest
29 C.F.R. § 516 (2006). See also U.S. DEP’T OF LABOR, WAGE AND HOUR DIVISION, FACT SHEET #21:
RECORDKEEPING REQUIREMENTS UNDER THE FAIR LABOR STANDARDS ACT (FLSA) (2008).
77
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these findings without waiting for the DOA to file an enforcement suit. This is because after a
finding is issued by the DOL, an employer may have the right to seek a declaratory judgment
action from a court under the Administrative Procedures Act (“APA”) seeking a judicial
determination of whether it is in compliance with the FLSA.78
To secure a declaratory action against the DOL, an employer will likely need to
demonstrate two things: subject matter jurisdiction and ripeness. In order to demonstrate subject
matter jurisdiction under the APA, the employer must show that the DOL’s findings constitute a
“final agency action.” On the outset, it is important to note that sovereign immunity typically
protects the federal government from lawsuits unless immunity is waived; however, the APA
does contain such a waiver.79 Under the APA, if an individual “suffer[s] [a] legal wrong because
of agency action, or [is] adversely affected or aggrieved by agency action within the meaning of
a relevant statute,” that individual is entitled to a judicial review of the agency’s decision. 80
However, there must be a “final agency action” in order for a court to have subject matter
jurisdiction to review the decision.81
To determine whether an agency’s decision constitutes a “final agency action” under the
APA, the Supreme Court has set forth a two-part test:
(1) The action “must mark the ‘consummation’ of the agency’s decision-making
process—it must not be of a merely tentative or interlocutory nature;” and
(2) The action “must be one by which ‘rights or obligations have been determined,’ or
from which ‘legal consequences flow.’”82
Thus, “[t]he core question is whether the agency has completed its decision-making process, and
whether the result of that process is one that will directly affect the parties.” 83 A final
78
See Gate Guard Services L.P. v. Solis, No. V-10-91, 2011 WL 2784447, at *12 (S.D. Tex. July 12, 2011).
See Rothe Dev. Corp. v. United States Dep’t of Defense, 194 F.3d 622, 624 (5th Cir. 1999).
80
5 U.S.C. § 702. See also Gate Guard Services, L.P., 2011 WL 2784447, at *3.
81
5 U.S.C. § 704; Am. Airlines Inc. v. Herman, 176 F.3d 283, 287 (5th Cir. 1999).
82
Bennett v. Spear, 520 U.S. 154, 177–78 (1997) (internal citations omitted).
79
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consideration is whether the agency action “has a direct effect on the day-to-day business” of the
plaintiff.84
Recent precedent indicates that a position statement by the DOL regarding a FLSA
violation constitutes a “final agency action.”85 In Gate Guard Services, the court determined that
a definitive statement by the DOL stating that Gate Guard was in violation of the FLSA, owed
back wages to its workers, and that it must reclassify and compensate its workers constituted a
final decision by the DOL.86 This is because the DOL had served papers on Gate Guard stating
that the back wages were “due,” and its representative had stated that the action was “final” and
the DOL expected immediate compliance.87 Noting that “[a]t no time did the DOL advise Gate
Guard that its decision was not final,” the court determined that the DOL’s actions were
sufficient to demonstrate that the agency had completed its decision-making process.88 Further,
the court determined that Gate Guard’s potential exposure to an enforcement action was
sufficient to constitute the harm necessary to seek a declaratory judgment.89
After demonstrating that there has been a final agency action, an employer may also need
to demonstrate that the declaratory action is ripe for review. This is because courts have the
discretion to determine whether they will decide a declaratory action.90 The Fifth Circuit uses a
four-part test to determine the ripeness of a case brought under the APA.91 It considers:
(1) Whether the issues presented are purely legal;
(2) Whether the challenged agency action constitutes a “final agency action” within the
meaning of the APA;
83
Franklin v. Massachusetts, 505 U.S. 788, 797 (1992).
Abbott Labs v. Gardner, 387 U.S. 136, 152 (1967).
85
Gate Guard Services, L.P. WL 2784447, at *9.
86
Id. at *5.
87
Id.
88
Id. at *5, *7.
89
See Id. *7–*9.
90
See Id.
91
Jobs Training & Servs, Inc. v. E. Tex. Council of Gov’ts, 50 F.3d 1318, 1325 (5th Cir. 1995).
84
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(3) Whether the challenged action has or will have a direct and immediate impact on the
petitioner; and
(4) Whether the resolution of the issues will foster effective enforcement and
administration by the agency.92
Further, the Fifth Circuit will also consider seven non-exclusive factors that must be addressed
when deciding whether to exercise their discretion over a declaratory judgment action.93 They
are:
(1) Whether there is a pending state action in which all of the maters in a controversy
may be fully litigated;
(2) Whether the plaintiff filed suit in anticipation of a lawsuit filed by the defendant;
(3) Whether the plaintiff engaged in forum shopping in bringing the suit;
(4) Whether possible inequities in allowing the declaratory plaintiff to gain precedence in
time or to change forum exist;
(5) Whether the federal court is a convenient forum for the parties and witnesses;
(6) Whether retaining the lawsuit in federal court would serve the purposes of judicial
economy; and
(7) Whether the federal court is being called on to construe a state judicial decree
involving the same parties and entered by the court before whom the parallel state suit
between the same parties is pending.94
Thus, the court will ultimately balance these factors to determine whether the suit is ripe and
justiciable. However, precedent suggests that on balance, a final agency action by the DOL is
sufficiently ripe and justiciable to weigh in favor of a court exercising its discretion to decide a
declaratory judgment action.95
92
Id.
St. Paul Ins. Co. v. Trejo, 39 F.3d 585, 590–91 (5th Cir. 1994).
94
Id.
95
See Gate Guard Services, Inc., 2011 WL 2784447, at *13.
93
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In sum, a negative FLSA finding by the DOL can be challenged by employers prior to the
filing of an enforcement lawsuit, securing employers with the ability to quickly and effectively
challenge a DOL finding. Although FLSA investigations and lawsuits may seem like an
expensive and burdensome cost of doing business, proactive business practices coupled with a
proper handling of any FLSA issue that may arise can serve to significantly insulate employers
from the inconvenient and costly penalties that may otherwise occur.
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