3 Steps Small Businesses Can Take to Prevent Wage and Hour Lawsuits

January 25, 2016・5 mins read
3 Steps Small Businesses Can Take to Prevent Wage and Hour Lawsuits

A worrisome business trend is the growing number of wage and hour lawsuits that are a significant source of financial exposure for employers. As the number of lawsuits climbs, so does the cost to employers.

The U.S. Department of Labor reports that it receives nearly 25,000 wage-and-hour related complaints per year. The number of Fair Labor Standards Act (FLSA) cases filed in the federal court is more than five times higher than it was 20 years ago.

Compensation considerations

Overtime claims account for 40 percent of wage and hour class action lawsuits. Other common wage-and-hour claims include:

  • Misclassification of employees as “exempt” from overtime
  • Failure to pay overtime
  • Failure to pay overtime and/or employee benefits to workers classified as “independent contractors”
  • Improper calculation of overtime pay
  • Pay for meals or breaks
  • Failing to pay for compensable time before or after the work shift.

And a new area of concern - the use of email and mobile devices outside of working hours.

The cost of wage and hour claims to small business

Wage and hour lawsuits are expensive to businesses because settlements can include:

  • Recovery of unpaid wages
  • Liquidated damages equal to the amount of unpaid compensation
  • A back wages award for up to three years
  • Attorney fees and related costs

Business owners can decrease the chance of a complaint or suit against them by taking some proactive steps.

Effective time-keeping measures

Employees and former employees often assert in class action lawsuits that the hours paid were not accurate and were under-reported or not reported by the employer. To prevent this type of claim, ensure that the workforce time-keeping practices are well documented and that the reported time is verified by the employee.

Best practices for accomplishing this include:

  • Using a standard system to record all time in and out, either electronically or with an actual punch-clock
  • Having each nonexempt employee record, review and sign off on their time each pay period
  • Implement a signed verification that the hours reported accurately include all time worked for the period
  • Requiring supervisors to monitor and review employees’ timecards

Additionally, it’s a good idea to implement a written policy that includes information for the employees, such as:

  • They will be paid for all time worked and overtime
  • Off-the-clock work is prohibited
  • Employees are required to accurately record their hours
  • Contact info for employees should they have concerns about their pay

Conduct a wage-and-hour audit

An internal audit of wage and hour practices by expert outside counsel can identify and help prevent most violations of the law - thereby helping to avoid a lawsuit. The cost for such a review is substantially less than the fees to defend - and possibly lose - a single charge.

An effective wage-and-hour audit will include review of employee classifications, such as:

  • Exempt versus nonexempt
  • Independent contractor relationships
  • Job descriptions
  • Timekeeping and payroll practices
  • Employment policies
  • Training and overtime calculations

If violations are found, counsel can advise strategies to correct them and deal with any potential back-pay obligations in ways that reduce the likelihood of litigation. After an effective audit, an employer will know the existing risks and can take the appropriate steps to bring the company into compliance.

Enhance compliance training

Another way to avoid wage and hour class litigation is to ensure human resources and supervisors are properly trained in the key danger areas where violations commonly arise. Employers must also ensure compliance with state wage and hour laws, not just the FLSA. Many states have variations and exceptions related to overtime exemptions, as well as wage payment laws that may differ from those of the FLSA. For example, while the FLSA’s fluctuating work-week system can reduce overtime liabilities for participating employees with varying schedules, nearly a dozen states have yet to adopt this method of calculating overtime, instead requiring the time-and-one-half formula.

Companies should conduct thorough review of state wage and hour laws in all states where they have employees.

Effective training, policies and enforcement can help prevent wage and hour violations, and reduce the chance of lawsuits. Should a problem be discovered, proper training can help remedy the situation before it becomes a complaint. If a complaint is filed, the organization will have the structure in place to address and correct it before it becomes a lawsuit.

Contact TriNet for more guidance on wage and hour compliance.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance. This post may contain hyperlinks to websites operated by parties other than TriNet. Such hyperlinks are provided for reference only. TriNet does not control such web sites and is not responsible for their content. Inclusion of such hyperlinks on TriNet.com does not necessarily imply any endorsement of the material on such websites or association with their operators.

ESAC Accreditation
We comply with all ESAC standards and maintain ESAC accreditation since 1995.
Certified PEO
A TriNet subsidiary is classified as a Certified Professional Employer Organization by the IRS.