The August 2012 Construction
Advisor ("Piece Work and the Fair Labor Standards Act")
discussed the financial risks of paying wage-earning employees on a "piece rate"
basis (i.e., for measurable work completed). While this practice is not uncommon
in the construction industry, as it can motivate employees to increase their
productivity, it carries a high risk of claims for unpaid overtime and failure
to pay minimum wage. The problem, which carries
grave consequences, stems from "misclassification" of employees – i.e.,
employers in the construction and other industries misclassifying their workers
as "exempt" (i.e., paid a salary instead of an hourly wage, to avoid overtime)
or as independent contractors (to avoid overtime and payroll taxes).
In an effort to force
employers to comply with wage-and-hour requirements and to punish employers that do
not, the U.S. Department of Labor's Wage & Hour Division has stepped up its
enforcement activity regarding suspected minimum wage and overtime violations,
publicly targeting certain sectors of the construction industry.
New Threat: Employee
As though the consequences
imposed by the government – including business and personal liability for unpaid
wages and payroll taxes, tax liens and other non-dischargeable obligations –
were not sufficiently severe, a new threat has recently emerged: private
lawsuits. We are seeing advertisements by consumer law firms encouraging people
to sue their current or former employers for alleged violations of the Fair
Labor Standards Act (FLSA). The suits are generally filed in federal court, and
they pose a serious threat to businesses and their owners and managers.
If an employee wins an
FLSA-based lawsuit against your company, you and the company may be on the hook
equal to the unpaid compensation (you read that correctly – if you owe a worker
$2,000 in unpaid compensation, you may owe him another $2,000 in damages);
and other costs incurred in bringing the lawsuit; and
post-judgment interest on damages, including potential statutory penalties.
Employer exposure is not
limited to overtime and minimum wage deficiencies. Claims can also stem from
alleged non-payment for work performed, a nebulous charge that employers bear
the burden to refute. Common employer responses – "I didn't know they were
working" or "they weren't given authorization to work" – while perhaps true,
offer little protection (potential defenses are discussed at the end of this
On employers' obligations, the FLSA is clear:
compensate employees for all work that employers permit employees to perform.
(29 C.F.R. § 785.11)
It is the
responsibility of employers' management to ensure that work is not performed if
not desired. (29 C.F.R. § 785.13)
Employers cannot accept
the benefits of employees performing work without compensating employees for
their work. (29 C.F.R. § 785.13)
While not every employer is
subject to the FLSA's requirements, the exceptions are few. You are governed by
the FLSA if you are "engaged in commerce" (you can probably stop right there) "or in the production of goods for commerce" or are "engaged in related
activities performed through unified operation or common control for a common
You must record all of the
time employees work, classify employees accurately as to whether they are
"exempt," and pay hourly workers overtime wages for all hours worked in excess
of 40 hours per week (except for certain conditions). If your records of
employees, wages, hours and other conditions and practices of employment are not
maintained per federal requirements, they not only provide little in the way of
a defense; they may also provide the evidence that allows the employee to
prevail in the lawsuit.
If employees are able to
demonstrate a pattern of willful and intentional behavior on your part, and your
lack of a good faith effort to comply with the FLSA, they have three years
within which to sue you and your company. Also, if you discriminate against
employees by, for example, threatening retaliation to force employees to work
more than 40 hours per week without overtime pay, you expose yourself to a
violation of Arizona's "Constructive Discharge Statute" (A.R.S. § 23-1502).
Your liability does not stop
with acknowledged employees. If you paid workers as "independent contractors,"
they may claim that you should have paid them wages (with overtime) and withheld
and paid over federal and state taxes. In that case, you are liable not just for
overtime and the taxes associated with it, but also the unpaid taxes on the
amounts that you did pay them.
Personal liability for
unpaid wages and associated liabilities is not limited to the company's owners.
Accountants and bookkeepers who process payroll and issue paychecks or have
responsibility for depositing FICA and withholding taxes may be liable by virtue
of aiding and abetting the employer's unlawful treatment of employees.
This exposure exists if the
matter stays between you and the worker in federal court. If the Labor
Department gets involved, you face penalties of $1,000 or more for each willful
and repeated violation of overtime pay requirements.
The State of Arizona has its
own employee-protection laws (A.R.S. §§
-355) that largely mirror the
federal requirements. Not surprisingly, Arizona's laws also provide a mechanism
for the employee to collect unpaid wages, along with attorneys' fees and costs
in bringing the lawsuit. Further, A.R.S. §
provides that, if the State gets involved in a minimum wage dispute, perhaps as
part of an investigation that initially focused elsewhere, the State may review the internal records regarding all employees
in order to protect the identity of any employee identified in the complaint.
Depending on the
circumstances, you may have certain defenses, stemming from whether the employee
authority to hire
or fire employees,
reporting directly to him or her, or
the ability to use
discretion regarding major work-related decisions.
For every one of those
circumstances that applies, the stronger your argument that the worker was
exempt from overtime and properly treated as a salaried employee.
What to Do
If you believe you are at
risk of facing an FLSA-based employee lawsuit, you should:
insurance agent and/or broker to see what types of insurance coverage may exist
for some of these violations;
your record keeping and employment practices to ensure you comply with state and
federal requirements; and
a human resources consultant with expertise in wage-and-hour record-keeping and
You should also call your
lawyer. If your current law firm has specific experience in wage-and-hour
violations, they can guide you through the coming steps. If they do not offer
the expertise you need, we invite you to contact us. We can help you evaluate
your liability and represent you in defending against the employee's claim or, if
the particulars of your case require it, refer you to an attorney who has the
specific experience you need.
See also: IRS Offers Tax Relief for Misclassifying Employees as