Wage and Hour Litigation and Lawsuits | Wage and Hour Compliance

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Payroll Processing: Proper Calculation of Employee Pay Helps Minimize Wage and Hour Compliance and Litigation Risks

This insight is from: "Trends in Wage and Hour Litigation Over Unpaid Work Time and the Precautions Employers Should Take"



With wage and hour litigation on the rise, payroll accuracy should be a top priority for employers. Our review of court data shows that of all state and federal court employment law class actions filed in the United States, 90 percent are wage and hour class or collective actions. This increase in wage and hour litigation stems from Department of Labor initiatives that seek to inform employees of their rights under FLSA and the growing number of lawyers specializing in Fair Labor Standards Act (FLSA) cases. Why should employers be concerned?  The potential damages in these cases are alarming: in 2010 the average settlement in the top 10 reported wage and hour class and collective actions was $34 million. Most wage and hour litigation claims involve: 1) unpaid work time, including payroll errors in calculating the value of bonuses and commissions for hourly employees who work overtime; and 2) misclassification of workers as exempt, leading to denial of overtime pay. This paper discusses current trends in unpaid work time litigation and makes recommendations for improving payroll accuracy that may help you, the employer, minimize your exposure to these claims.

Recent Trends in Collective Action for Unpaid Work Time Drive Payroll Imperatives

Unpaid work time litigation often results from auto-deductions for meal periods, rounding, remote work, and off-the-clock work — all of which present challenges for calculating accurate paychecks that comply with FLSA mandates. In each of these cases, all it takes is a few employees negatively impacted by an employer’s payroll policies to turn a personal gripe into a costly collective action. What can employers do to protect themselves? Implementation of automated payroll and timekeeping systems can help minimize internal employee complaints by automatically applying even the most complex wage and hour policies mandated by federal and state laws and/or union agreements. Adopting a policy that requires employees to certify the accuracy of their time records and paychecks can also help employers stay ahead of wage and hour litigation trends.

Failure to Properly Calculate Payroll “Regular Rate” Increases Risk of Employee Wage and Hour Complaints

Another trend involves errors in factoring the value of bonuses and commissions for hourly employees who work overtime. Overtime is calculated at a 50 percent premium rate from the regular rate of pay for hours worked over 40. The regular rate of pay includes not only the hourly wage paid to an employee, but in most cases, also includes other forms of nondiscretionary compensation such as bonuses, incentive pay, commissions, shift differentials, or retroactive pay increases. Nondiscretionary bonuses and commissions can be problematic from a payroll perspective because they generally must be apportioned back over the period in which they were earned. Given these complexities and the associated litigation risks, employers may want to consider adopting payroll practices, backed up by automated systems, that speed and ease bonus recalculations while minimizing the need for payroll personnel to calculate “regular rates” using error-prone manual methods.

Payroll Processes and Automation Help Employers Stay Ahead of Wage and Hour Litigation Trends

Employers can minimize wage and hour compliance and litigation risks associated with unpaid work time by adopting strict payroll policies and implementing payroll software that can automatically apply complex work and pay rules mandated by FLSA and union collective bargaining agreements. Specifically, the implementation of policies, training and auditing in conjunction with automated time and attendance and payroll systems can help minimize employee wage and hour complaints and address those that may still arise.

 *A complete list of sources and citations can be found in the full report.

The average settlement in reported wage and hour actions was $34 million. Source: Littler Mendelson review of court data.

About This Report: This report was commissioned by ADP and authored by Laurent Badoux, Esq., of Littler Mendelson, P.C. Littler Mendelson is the largest U.S.-based law firm exclusively devoted to representing management in every aspect of labor and employment law. The expert opinions and best practice recommendations in this report are those of the author alone.

Keywords: Compliance, Payroll

Business Types: Research for Small Organizations, Research for Midsized Organizations, Research for Large Organizations

Roles: Research for Finance Professionals, Research for Human Resources Professionals

Trends in Wage and Hour Litigation Over Unpaid Work Time and the Precautions Employers Should Take

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