Miscalculating OT Pay

Personal Liability for Hard-to-Spot Overtime Risks

What are the chances you have an overtime violation that's under your radar?  In 73% of its recent wage and hour investigations, the DOL found violations.  That's what the DOL's new enforcement data website says.

And the federal overtime law, the FLSA, puts your personal skin in the game.  Depending on the circumstances, an overtime claimant can impose individual liability on managers, officers and even directors.

In Goetz v. Synthesys Technologies, Inc., a federal court in Austin put a director on trial for the overtime pay sins of his company.  The court refused to let the director skate on summary judgment.  Pointing to the director's heavy involvement in a round of layoffs and participation in an employee training seminar, the court tossed the director's personal liability to an Austin jury.

Don't count on your insurance company to pick up the tab.  Many EPLI policies won't cover overtime claims—they're specifically excluded.  Insurance companies know that overtime compliance is a risky business.

Protect yourself by spotting and resolving overtime risks before they become collective action lawsuits.  Just a few common ground zero risks:

  • Independent contractors who should really be employees receiving overtime pay
  • Salaried exempt employees whose job duties do not match the overtime exemptions
  • Salaried exempt employees whose pay is docked against overtime rules
  • Automatic deductions from the time clock for lunch and other breaks
  • Failing to pay non-exempt employees for their time:
    • Working from home on a smart phone
    • Booting up a computer before a shift

More Than You Bargained For

You expect to take on a company’s liabilities when you buy it outright.  But when you buy a company’s assets, you want a clean deal.  You certainly don’t want any of the selling company’s liabilities.  What if, after an asset purchase, you had to swallow an overtime lawsuit against dozens the selling company’s ex-employees who were demanding unpaid overtime wages?

That’s exactly what happened to a company in front of a Houston federal judge.  In Cooke v. Jasper, the company who bought the assets had to answer for the seller’s overtime problems.  A group of the seller’s ex-employees initially filed the lawsuit against the seller alone.  Learning that the seller had gone out of business once its assets were sold, the ex-employees hauled the buyer into the lawsuit.  The ex-employees alleged that the buyer was a “successor employer” to the seller.  The federal judge refused to dump the case.

Sifting through nine factors, the federal judge focused on three.  First, the buyer knew about the ex-employee’s overtime claims.  The only shareholder of the company selling the assets clearly knew about the claims, and he became the buyer’s employee before the asset purchase.  Second, the seller had no funds to pay a money judgment because the company had gone out of business.  Third, the buyer used the assets to engage in roughly the same business as the seller had.  Instead of letting the buyer escape liability, the judge ruled that the buyer had to stand trial for the seller’s sins.

Here’s when you could be at real risk too if the seller goes out of business after you buy its assets:

  • You learn about an overtime dispute during your due diligence before purchasing the assets;
  • You hire any of the seller’s employees before the asset purchase; or
  • You hire the owner of the seller at the same time you buy the assets, leaving the impression that the owner worked for you earlier.

No matter whether you’re buying a company or just its assets, it’s always better to check out overtime pay practices first.  Your due diligence could save you a costly overtime lawsuit.

Take Back the Driver's Seat

Overtime lawsuits alleging that you misclassified a position as salaried exempt follow a common path--the plaintiff's lawyer always hands you a huge tab.  What the lawyer doesn't tell you is that he crunched his numbers using the method that spits out the highest liability.  There's a better way.

Misclassification liability might instead be calculated with the fluctuating workweek method.  Applying this method normally reduces liability by 60-70%.  That deflates a plaintiff's lawyer pretty quick, putting you in the driver's seat to broker a settlement deal.

In Toletino v. C&J Spec-Rent, a federal court in Houston's backyard endorsed the fluctuating workweek method.  The plaintiff employees admitted that they had received a fixed salary and understood their hours would vary without any additional overtime pay.  With that admission, the court ruled that the more company-friendly liability model applied.  But what if the plaintiffs hadn't admitted this obvious truth about their salary during the lawsuit?

Your company's employee manual should nail down the admission long before a plaintiff's lawyer gets involved.  Your manual should say that salaried employees understand their salary will be their only pay for all hours worked.  Carefully wording this part of the employee manual is critical to triggering the fluctuating workweek method.  And it is your most fundamental line of defense.

Luby's Gets Served by its Own Policies

HR folks spend hours writing and re-writing policies.  There's good reason for that—your policies are the first place a plaintiff's lawyer will look to launch an overtime lawsuit.

Luby's tip pooling policies recently cost the company a collective action against its waiters.  In overtime land, that's like a class action where a group of your employees and ex-employees gang up on you in a single lawsuit.  It gives your employees a lot more leverage than filing a bunch of individual lawsuits.  Bad policies are often ground zero for a nasty collective action.

Although Luby's tried to convince the federal judge that the big collective action should be shaved down to individual lawsuits, the judge didn't buy it.  Employees can get together in a collective action if they are "similarly situated."  According to the judge, the waiters were all "similarly situated" because the tip pooling policy under fire had applied the same to all of them.

One bad policy can cause an expensive problem.  For example, a job description might fuel a lawsuit alleging that a group of employees has been misclassified as salaried exempt if the job description shows the position has non-exempt duties.  Exempt status can also be jeopardized by a pay docking policy.

Plewinski v. Luby's Inc.

Per Diem Deal Goes South

Per diem pay is fundamental, especially in the travel-heavy energy industry.  But if it's done wrong, per diem pay can trigger overtime liability.

What if a company pays an employee $12.50 per hour, up to 40 hours in a week, as a per diem?  The employee scores some extra bucks, while the company saves per diem expenses.  Fair deal, right?  Not exactly.  In Gagnon v. United Technisource, the Fifth Circuit ruled that the company had shorted the employee on overtime pay.

Here's the math.  Overtime wages must be paid at 1.5 times an employee's "regular hourly rate," which generally includes everything an employee is paid for his work (except for overtime pay).  The company assumed that the "regularly hourly rate" only included hourly wages, but the court said the per diem pay had to be included too.  That drove up the price of an overtime hour.

Paying the per diem hourly got the company into hot water.  The Department of Labor believes that per diem pay must be included in the "regular hourly rate" if the per diem changes with the number of hours worked.  The court agreed.  Also, it smelled like the company was trying to avoid paying more for overtime hours.  The company promised to pay the employee minimum wage, plus overtime hours at $20.  No matter how many hours the employee worked, his hourly wage stayed about $20 because of the $12.50 hourly per diem.

Per diem pay is normally safe if it's a fixed amount for a single day's work that is reasonably close to the employee's actual business expenses.  Straying from that formula risks getting second-guessed by a court.  And the dollars can be staggering.  Scores of employees and ex-employees who had per diem pay may join the lawsuit.