Editor’s note: This is the second installment in a series examining labor litigation brought under the Fair Labor Standards Act. Over the coming days, the Cook County Record will delve into the issues driving FLSA litigation, examining the growth in the number of lawsuits and the impact such litigation is having and will have on employers of all sizes and types and their employees.
In the past 25 years, employers of all sizes have faced a mounting number of lawsuits brought under the federal Fair Labor Standards Act by current and past employees who argue they have been shortchanged.
In 2004, for instance, when rules changed governing how the law would be interpreted and enforced, FLSA-related litigation spiked.
And business groups and lawyers on both sides believe the country may be poised for a similar jump in FLSA court activity, leaving employers certain of just one thing:
This will likely cost them.
Navigating the requirements of the FLSA and of the Department of Labor which enforces it can become a nightmare for businesses, said John Billhorn, a Chicago lawyer who has focused exclusively on employment law litigation since 1987.
“There are a fair amount of employers stepping on boundary lines,” Billhorn said. “Either they try to interpret provisions and do so erroneously, or they decide it [is] too expensive to comply and choose to try to trim the fat here and there.”
In the event that a business does face litigation, less than 5 percent of FLSA cases go to trial, said Ed Bergmann, a senior partner at the Chicago office of international law firm Seyfarth Shaw LLP.
Most companies try to settle quickly because the numbers start to add up, agreed John Michels, a partner at Lewis Brisbois Bisgaard and Smith LLP Attorneys in Chicago, who represents businesses facing FLSA actions.
In a case involving 1,000 employees who each allegedly is owed $150 to $250 in back pay, a losing employer could be responsible for paying a baseline of $150,000 to $250,000 in damages, Michels says. If the employer’s failure to pay overtime was deemed willful, that figure could be doubled to $300,000 to $500,000. Plaintiff’s attorney’s fees could cost $200,000 more, and employers would have their own lawyers to pay, plus any additional damage awards.
“Suddenly you're looking at a case that could be close to $1 million,” Michels said. “You'd rather settle.”
Michels compared today’s wage and hour law litigation with environmental law of the 1980s, which “was the most lucrative law you could think of practicing,” Michels says.
“The federal government stepped in and began regulating the living daylights out of environmental areas,” he said. “Wage and hour law and employment is very much like that. It’s such a heavily regulated area, you shouldn't make a move in it without touching base with a wage and hour lawyer.
“It’s been lobbied, litigated and legislated over the last 70 years,” he added. “Unless you're really good at it, you're going to make a mistake.”
WHITE COLLAR, LESS EXEMPT
Elizabeth Milito, senior executive counsel for the National Federation of Independent Business, said she believes the small business owners with whom she works on a regular basis want to do right by their employees, but FLSA’s complexities make it difficult.
And regulations are about to change, complicating matters further.
Last year, President Barack Obama directed the Labor Department to revise the regulations on white collar exemptions, and July 6, the DOL posted on its website an explanation of its proposed rulemaking:
“Failure to update the overtime regulations has left an exception to overtime eligibility originally meant for highly-compensated executive, administrative, and professional employees now applying to workers earning as little as $23,660 a year,” the DOL explained. “For example, a convenience store manager, fast food assistant manager, or some office workers may be expected to work 50 or 60 hours a week or more, making less than the poverty level for a family of four, and not receive a dime of overtime pay. Today’s proposed regulation is a critical first step toward ensuring that hard-working Americans are compensated fairly and have a chance to get ahead.”
The new set of proposed rules would effectively double the salary threshold for exempt white collar workers. If approved, the new standard salary level for full-time salaried workers would rise from $455 to $921 a week, or $47,892 annually. The so-called “highly compensated employee annual compensation level” would rise to $122,148.
Put simply, the changes would have an even greater impact than those in 2004, said Bergmann.
“It’s going to have a dramatic effect on many businesses because of the fact that we’re changing from a duty-driven test in many respects to a compensation level test, which will be more controlling,” said Bergmann. “In a lot of areas, there are people who clearly make the duties test who do not make [$455] a week, particularly in retail, hospitality, [restaurants and] others like those.”
The Labor Department expects the new white collar exemptions will extend overtime protections to nearly 5 million workers, which is going to cost employers, especially small businesses, a hefty sum just to figure out who is exempt and who isn’t, said Billhorn.
Many times, small and mid-sized employers don’t have a human resources department or other in-house counsel to educate business leaders, leaving them operating in the dark when it comes to compliance, Billhorn said.
“[Businesses will] have to hire consultants, new human resources employees,” Billhorn said. “I don’t know what the ultimate [cost will be], but it’s going to be more expensive for employers to comply with the Obama changes than it was before.”
If a business was teetering, the extra expense of finding human resource or legal aid could be treated like an insurance policy, and employers might take on the risk of litigation instead of paying upfront to make sure they’re following the law correctly, Billhorn said.
COMING SOON: RESTRUCTURING
Beyond seeking help with compliance, employers will likely need to rewrite their job descriptions and possibly even restructure their business, with the decision of paying current employees more, cutting their hours or terminating them completely on the docket, said Michels.
Marc Freedman, executive director of labor law policy at the U.S. Chamber, agreed, predicting the new regulations will be a net negative for employees.
“The idea that this going to put more money in people’s pockets is not true,” Freedman said. “Instead of getting one 50-hour employee, you’re going to get two 25-hour employees. I’ve sat and talked to enough people to know that’s what’s going to happen. I’m trying to say this in a way that doesn’t make employers sound evil and greedy, but employers need to be profitable.”
For the industries that currently have exempt managers who will become nonexempt under the new salary bump, one of two scenarios may play out, Michels said
Some industries will see a hiring boom, Michels said. But others, like the fast food industry, may turn to automation.
“If you're requiring employers to double the labor salary, then you're essentially telling employers it’s now costing you ‘X-amount’ for this guy,” Michels said. “[A] machine will pay for itself, in half the time, flipping burgers.”
Milito said some businesses aren’t sure how to restructure themselves to pay double the labor cost, but they understand they’ll have to.
“From small businesses, there’s great concern,” she said. “Business owners with whom I’ve talked … [are saying], ‘We don’t have any more money. We can’t charge more for a burger or steak dinner because customers won’t pay more. I have to restructure. I can’t pass the cost onto my customers.”
Nonprofit organizations, in particular, will be hit hard, said Freedman.
“They’re really in a tight bind because they don’t have a revenue stream,” he said. “They’re dependent on government funding of sorts, which is unreliable, or private philanthropy. When they have to increase their labor costs, as this rule will do, they’re really in a bind.”
TAKING THE STEPS
Amid all the litigation revolving around the FLSA, there are steps that business owners can take to prevent being sued.
“I tell businesses this: It’s really important to perform an audit on a regular basis,” Milito said. “Positions can change. Duties change. Assignments change. As we get to more remote working situations where you have employees who might be non-exempt employees working from home … that’s where businesses can get in trouble.”
Bergmann suggested a more preemptive approach, urging business owners to voice their opinions during the Labor Department’s 60-day comment period.
In 2004, he noted, the exemption minimum originally proposed by the DOL changed before becoming law, jumping from $425 to the current $455. The highly compensated individual rate also increased, from a suggested $65,000 to the current $100,000.
“It’s hard to tell where the numbers will go … but I would hope the DOL would take serious consideration in the comments,” Bergmann said.
Editor's note: The U.S. Chamber Institute for Legal Reform owns the Cook County Record.