From discrimination to retaliatory discharge, companies with 100 or more employees can expect an Employment Practices Liability (EPL) claim every three years1. And even if you believe you’re doing everything by the book, you can still end up on the hook for a costly lawsuit; the median EPL judgment is $200,000, not including defense costs2.
Of all the types of EPL claims, wage and hour claims often cause employers the greatest frustration. Wage and hour claims frequently arise in the form of class-action lawsuits, and can be triggered by any number of complaints, including commission and bonus disputes, pay discrepancies and employee misclassifications.
Here are seven common questions about wage and hour claims — along with the answers you need to help protect your balance sheet from the potentially devastating impact of these lawsuits.
Q: What are the causes of wage and hour claims, and how can employers limit them?
A: Wage and hour claims arise when a non-exempt or non-salaried employee makes a formal complaint about unfair compensation for work done, for example, being denied overtime pay. It is difficult to entirely avoid wage and hour complaints, but you can take some proactive measures to limit them, such as requiring employees to sign a weekly timesheet, verifying meal and rest breaks and recording overtime.
Timesheets are proof of time worked and the employee’s acknowledgment that the time is accurate. Companies should be diligent in maintaining these records, retaining them for several years and documenting timesheet procedures to ensure a strong defense in the event of a claim.
The law changes frequently, so you should review your processes for capturing meal and rest breaks and overtime with your attorney to confirm their compliance and effectiveness. Any employee time spent with the employer should be recorded, including, for example, time for logging into a system, changing into a uniform, cleaning up or traveling to a work site in an employer vehicle.
Q: Does it make sense to have exempt or salaried positions only, given all the litigation risks associated with wage and hour claims?
A: Unfortunately, this is not a choice that an employer can make. While classifying some employees as salaried makes sense, not everyone can be classified this way according to strict rules passed under the Fair Labor Standards Act. The pay scale and job duties of each employee dictate whether special pay rules apply. According to the Department of Labor, exempt or salaried employees must perform relatively high-level work, including tasks that involve management responsibilities, professional or technical knowledge, or other duties requiring independent judgment and discretion.
Q: Does an employee’s pay scale determine if they are eligible for overtime or not, and how is that determined?
A: Pay scale is only one factor in the determination of eligibility for overtime, which is why employee classifications are not straightforward. In addition to the pay-level test, the Department of Labor applies a job-duties test (state rules may add other requirements). To avoid any confusion, companies need to draft specific job descriptions to align each employee’s job duties with their job functions. According to the duties test, unless an employee performs professional, executive or high-level administrative functions, the employee falls under the hourly pay category, even if their responsibilities are of a higher level than those traditionally associated with hourly employees; the Department of Labor has significantly expanded the category of hourly employees and their rights to overtime pay. Accurate classifications can drastically reduce wage and hour claims, and help bolster an effective defense in the event a claim arises.
Q: Should I talk to a compensation consultant to avoid some potential wage and hour issues, such as overtime pay?
A: More and more companies are using compensation consultants to help them structure pay and incentive programs. If you take this step, it is recommended that you have your program vetted by a wage and hour attorney to ensure that job roles are clearly delineated and properly classified at every level.
Q: How does a business avoid independent contractor classification issues?
A: All businesses should conduct a classification audit. You should also look at the Labor Department’s six-part assessment for classifying employees, and review the IRS’s workers’ compensation tests to help identify which tasks and responsibilities are allowed for employees, and which for independent contractors. Your audit should clearly identify who has control over the work by asking questions such as these:
- Does the independent contractor have full control of their own profit or loss?
- Who owns and controls the tools used to complete the job?
- Is the contractor self-sufficient in job training and development?
- Are the specific work terms outlined in a contract?
Q: How often should an organization run a classification audit? Does it depend on size, employee count, or the states in which they operate?
A: A company should conduct an audit at least every two to three years if its processes are consistent over time. If processes change more frequently, audits should be conducted to keep up with the changes. As part of the audit process, changes should be implemented to reflect new laws, and the most current information should be added. Think of it as a task similar to updating an employee handbook. This applies to all companies, regardless of their size or location.
Q: Should independent contractors be covered under the employment liability insurance policy of the business that contracts the services?
A: If the business hires independent contractors on a regular basis, they should be covered under the company’s employment liability insurance policy. Employment claims commonly arise in situations where the employment relationship is unclear, regardless of whether an individual is an employee of the hiring business or the contracting entity. Courts have applied tests that are not straightforward in this area. The independent contracting company should also have its own employment liability coverage to address its own risks on a federal or state level.
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1. Westlaw, 2012–2013 Edition of Jury Award Trends and Statistics
2. 2015 Hiscox Employee Lawsuit Handbook – Employment Practices Liability: Jury Award Trends and Statistics 2013 Edition, Thompson Reuters