Class action wage and hour litigation is expected to “explode” in 2022, according to a report from the Seyfarth Shaw national law firm.

The prediction is based in large part on the Biden administration’s new employee-friendly wage and hour regulations and a stated goal of increasing enforcement of wage and hour laws. The administration already has withdrawn or rescinded multiple Trump-era rules often implicated in workplace class actions, including the tip credit, joint employer and independent contractor rules promulgated by the U.S. Department of Labor under the Trump administration. And on Feb. 1, the DOL announced plans to hire 100 wage and hour investigators during the 2022 fiscal year.  

Seyfarth Shaw reported the total value of the top 10 wage and hour class action settlements ballooned in 2021 to $641.3 million, more than double the $294.6 million in 2020.

Wage and hour violations are expensive for employers.  Employers may be held responsible for two years of unpaid wages — three years if they can’t show they failed to pay wages in good faith. Courts may add an equal amount in liquidated damages. And in any legal action in which an employee recovers back wages, the employer is usually required to reimburse the plaintiff’s reasonable legal fees and costs.

Given increased scrutiny and the potential costs of wage and hour violations, what pitfalls must employers avoid and how do they do so?  

The most expensive and common violation employers commit is failing to pay overtime. This can arise from a variety of circumstances. 

Failure to pay overtime frequently arises from misclassification of employees. These cases arise when workers misclassified as independent contractors work more than 40 hours in any workweek. Different federal and state agencies and courts use different tests to determine independent contractor status, but two elements are common to all tests. First, the worker is free from the control and direction of the hiring entity in connection with the performance of the work. Second, the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

Failure to pay overtime claims also arise when an employer allows an employee to work unreported hours. This occurs when an employee works outside normal work hours and doesn’t report extra time worked or a remote employee doesn’t keep accurate records of time worked, among other situations. The key here is the Fair Labor Standards Act requires an employer to pay for all hours it “suffers or permits” an employee to work. Court cases have held employers liable for back wages where the employer should have known an employee was working when the employee sends emails or texts outside normal hours or tasks unfinished one day inexplicably are finished when the next day begins. But in Pabst v. Oklahoma Gas & Elec. Co., the 10th Circuit Court held that where an employer had a clear policy prohibiting unauthorized overtime and had no actual or constructive knowledge employees worked overtime, the employer did not “suffer or permit” the employee to work unreported hours.  

To avoid unreported work and overtime claims, employers should have clear policies on working outside the scheduled workday and working overtime without authorization, require employees to actually work all time spent working and keep accurate records of hours worked. Timekeeping systems that require employees to enter only the hours worked in a day or a week instead of logging actual times worked are notoriously inaccurate and prone to scrutiny in a DOL audit. A DOL officer who sees a string of eights under hours worked for workweek after workweek will presume the records are inaccurate and give greater deference to employee estimates of the hours they worked beyond the normal workday. What employee consistently works exactly eight hours every day?  

Remote employment increases the risk employees will report inaccurate hours. At least one ruling held that remote employees who routinely took up to 5 minutes each day to log on and reach the online timekeeping system were entitled to back pay and overtime for time spent working before accessing the timekeeping system.

Another wage issue that arises with remote employment is shifting the ordinary cost of doing business to non-exempt employees who work remotely. Consider, for example, an employee required to have a specific level of internet service or buy office supplies or office furniture. Even if expenses come out of pocket, the DOL looks at these expenses, if unreimbursed, as indirect deductions from wages. Consequently, overtime isn’t calculated on the true regular wage rate. Employers should consider reimbursing employees for routine expenses incurred working remotely or even regular additions to wages to cover the cost of remote work.

Another timekeeping problem arises when employers look only to total hours worked in a pay cycle to determine overtime instead of calculating overtime on hours worked over 40 in any single workweek.

Finally, improper treatment of bonuses can result in expensive overtime claims. Employers must include nondiscretionary bonuses in the regular rate used to calculate overtime. Discretionary bonuses may be excluded from the employee’s regular rate. Discretionary bonuses are bonuses for which the employer retains sole discretion over whether the bonus will be paid and how much it will be until close in time to the payment of the bonus, or bonuses are not paid in compliance with a plan, agreement or other promise that cause employee to expect payment of the bonuses. The DOL usually deems referral bonuses, bonuses for extraordinary efforts not addressed in an existing bonus plan or policy, severance bonuses or employee-of-the-month bonuses to be discretionary bonus.

A nondiscretionary bonus is any bonus that doesn’t qualify as a discretionary bonus. Any bonus awarded to an employee who works to meet specific standards and expects a bonus for meeting those standards is nondiscretionary. Attendance, production and safety bonuses are usually nondiscretionary bonus.

This isn’t to say an employer must include the whole bonus in the regular rate for the single pay period in which the bonus is paid. That would lead to some astonishing hourly rates. An employer may allocate the bonus over the entire period in which the employee worked to earn the bonus. A monthly performance bonus is allocated over the month to which it applies, while an annual bonus may be allocated over all pay periods in the year the employee worked to qualify for the bonus.

Employers should carefully examine pay and recordkeeping practices to avoid costly wage claims. The Employers Council offers resources to help member employers handle wager matters.