Client Alert: WHD Tells Stakeholders: "We Can Help." Better Watch Out If You're an Employer, However

Date: May 24, 2010

The Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL)held a stakeholder conference at DOL headquarters on May 21, 2010 for the purpose of receiving feedback from employers, employees, and the organizations that represent them regarding WHD's proposed regulatory and enforcement agenda for FY 2010 and 2011. To counteract perceived widespread worker misclassification overtime violations, WHD will be pursuing an aggressive auditing and enforcement policy, targeting industries that "have been setting the pace in the race for the bottom of the compensation scale," according to WHD Deputy Administrator Nancy J. Leppink. WHD's Misclassification Initiative emphasizes the detection of misclassified employees as part of the designated FY 2010 and 2011 strategic enforcement plan. WHD is coordinating with other DOL agencies, the Department of Treasury, the Vice President's Middle Class Task Force, and State agencies to identify, investigate, and prosecute violators to the full extent of the law. In FY 2009, 250 new WHD investigators were hired and trained; 100 additional investigator positions are allocated for FY 2010. The President's FY 2011 DOL budget request includes $12M for WHD increased enforcement. WHD audits will no longer be confined to a particular employee classification or employment facility. Instead, WHD will pursue corporate wide compliance, with the stated goal of reaching the broadest possible determination as to the employer's liability for FLSA non-compliance as well as other laws administered by WHD, including child labor and prevailing wage laws. WHD stated that they want to leverage the agency's compliance budget by targeting large employers, assessing large back pay liability sums on behalf of injured employees, and pursuing injunctive and declaratory relief before the courts – thus maximizing the deterrent effect of WHD's enforcement efforts. Within the next six months, WHD expects to issue revised FLSA regulations, which will include major changes in employer recordkeeping obligations. Specifically, employers will be required to maintain written records stating the factual basis for claiming independent contractor status and/or exemption from the minimum wage and or overtime requirements for each employee, together with a record that this information has been disclosed to the affected employee. Employers who fail to maintain such records will have to overcome a presumption that any violation is willful and will face the maximum penalties available under the law. No safe harbor or amnesty will be made available to employers who may have violated laws enforced by the WHD and there are no plans to publish corrective action procedures to employers who desire to correct past violations on a voluntary basis. As one official stated: "If an employer wants peace of mind it must change its compensation practices immediately to conform to the law, pay the misclassified workers three years' back wages and be done with it."[1] On a related note, WHD will no longer entertain requests from employers and their attorneys to supervise the distribution of back wages to employees and obtain signed WHD Form 58 releases from employees. Further, WHD anticipates revising Form 58 in Summer 2010 to limit its effect to a mere notice of receipt of unpaid wages, potentially limiting its use as a bar to further liability in the event of a private lawsuit or enforcement action. As announced in April, together with the rescission of a 2005 opinion letter holding mortgage brokers to be exempt from the payment of overtime under the administrative exemption, WHD will no longer provide advice to individual employers who are unsure of their obligations under FLSA and seek clarification that a particular employee or class of employees is overtime exempt through a request for an administrative opinion. WHD's new announcement creates a break with a 40 year tradition of offering employers a statutorily recognized safe harbor from overtime liability if subsequently sued by the Secretary or the subject class of employees, provided the facts are as stated in the prior written disclosures providing the basis for the exemption opinion. Best Practice Tips If sued by individuals or their representatives, liquidated damages are presumptively available to plaintiffs, rendering the judgment equal to double the amount of back pay liability, in addition to payment of the plaintiffs' attorneys' fees and costs.[2] Further, any owner, officer, board member or supervisor of an employing entity with knowledge of the entity's unlawful worker classification and compensation policies and procedures can be held individually liable for back pay and civil money penalties assessed by the Administrator against the employer, or the amount of any final judgment rendered by a court of competent jurisdiction under the FLSA. In bankruptcy, FLSA wage claims have priority over secured and unsecured creditors. Most EPLI insurance policies do not cover wage and hour audits, lawsuits or judgments. Following the advice of competent wage and hour counsel can serve as a legitimate defense to a claim of liability and liquidated damages in the event of a future suit or audit. Where the employer has made full disclosures of all relevant facts and circumstances to counsel, and counsel has advised that the employer has complied with the FLSA compensation scheme, the employer may elect to waive the privilege and permit the attorney to testify based on the results of the audit that the employer is not liable to an employee or class of employees for unpaid wages or overtime.

The data gathered for, and preliminary and final reports resulting from, self-audits and admissions made to third parties outside the scope of the attorney client relationship are subject to discovery and provide a quick and easy means of establishing liability, willful misconduct, and the amount of back pay owed to covered workers. For that reason, employers would be ill-advised to engage in self-audits.

Prudent employers will also employ tax counsel to advise the employer on the filing of amended returns and the payment of associated taxes and penalties due to IRS based on misclassification or underpayment of wages in past tax years, based on the results of the audit conducted by wage and hour counsel. Because the definition of employee under the FLSA is broader than under the tax code, it is recommended that wage and hour counsel take the lead in determining whether particular employees or classes of employees should be classified as employees or independent contractors.

[1] The general statute of limitations for FLSA overtime and minimum wage violations is two years, except that the limitations period may be extended to 3 years in the case of willful violations. In general, courts require proof that an employer ignored a prior WHD determination with respect to the treatment of a particular employee or class of employees in order to make the employer liable for 3 years' back pay.

[2] Some states have adopted little FLSA statutes that provide more generous liquidated damage schemes. For example, the Maryland Wage and Hour Act provides for the payment of treble the back pay liability with respect to persons employed in Maryland in the event of suit to collect unpaid minimum wages and overtime. For that reason, many plaintiffs' lawyers file suit in state courts seeking recovery only under the state statute.