It is every employer’s nightmare: You find out that employees (or former employees) are claiming that they were not paid properly and are due overtime for the last two or three years. This primarily arises because you classified the employees as exempt (salaried) under the FLSA and they are challenging that classification, or the employees were simply not getting paid time and a half for every hour worked over 40 in a workweek (or under a different state law standard). You certainly did not intentionally misclassify anyone or deny employees overtime pay. How do you handle the matter?

Step One: Call Employment Counsel

Whether it is a single employee coming to Human Resources or a letter from a lawyer or the Department of Labor, you need to investigate. Because you do not want to have to turn over your investigation in litigation, you need to invoke the attorney-client privilege. If you got a letter from a lawyer or the DOL, you should also consider instituting a litigation hold (so you do not get accused of destroying relevant documents).

Step Two: Start Your Investigation

As an initial matter, look at the specific claim and check your payroll records. Confirm that the employees were or were not paid the way you intended.

If the employees are classified as exempt from overtime, confirm what exemption applies. Check to be sure that you were following those rules. If you believe the employees are properly classified as exempt, work with your lawyer to respond to the employees and/or their lawyers. If you find that there was a mistake, go to steps three and four.

If the employees are classified as nonexempt and claim they are due overtime, check their time records and talk with their supervisors. In this kind of litigation, the burden is on you to maintain good time records (preferably filled out and signed by the employees). Did the employees report overtime and simply not get paid for it? Did they not record overtime and are now claiming that the company was requiring them to work off the clock? Are they claiming the company automatically deducted from their time for a lunch period they never got to take? Is there a rouge supervisor who was working employees off the clock or altering time records?

Step Three: Fix Any Problems (If You Can)

If you have a problem, you need to look at potential ways to correct it, both in the future and the past. Prospectively, you will probably need to change the process that is causing the problem by either making the exemption from overtime stronger, finding another exemption that works, or paying the employees overtime (which can include taking steps to limit that overtime in the future). For past problems you will need to decide whether to pay employees the back wages now and, if so, what amount and to which employees.

Changing your process can limit your exposure going forward, but it needs to be handled carefully as it can highlight that there was an issue before the change and lead to additional claims. Fixing the issue immediately is important. In certain situations, you have a “window of correction” that may enable you to avoid liability for a mistake. If the employees file a lawsuit, they can recover unpaid wages two or three years from the time the lawsuit was filed. If you fix the problem, every day that passes before the lawsuit reduces your potential liability and new hires begin work compliant. Typically, there are options. For example, you could change the employees’ duties or method and amount of pay (so they are properly classified as exempt). Another option could be to change the employees’ work schedules to limit the overtime they work and add policies, documentation and oversight to help limit claims that employees worked more than they recorded or were paid.

Paying employees back wages raises some additional issues: How much to pay? Can you get a binding release of claims? (That answer is typically no unless you get it approved by a court or the DOL, but there are some options to limit such risk.) Do you have to pay employees who no longer work for you? See step four for more information.

How you communicate with your employees (and former employees) is key. You definitely want to be truthful, but you don’t want to tell them something that makes them more likely to consult a lawyer (if they don’t already have one). You also don’t want to suggest to them that they have been mistreated and need to get someone else involved to protect their rights. Remember, you are a good employer and want to treat your workers well. If you made a mistake, figure it out and move on. Again, your labor lawyer can help.

Step Four: Figure Out the Potential Exposure and Come Up with a Plan

The good and bad news about these claims is that the potential exposure is calculable. An employee who succeeds on an FLSA claim for unpaid wages potentially can recover:

• Two or three years of unpaid wages,
• Liquidated damages in an amount equal to the unpaid wages, and
• Attorneys’ fees.

Hopefully, you have time records that can help with the calculation. If you have a misclassification matter, you may want to check records to show when your exempt employees were at work — like parking or building access records or computer log ins.

Figure out your potential exposure and come up with a plan. Do you want to pay back wages to all your current affected employees? Do you pay two years, three years or something else? Remember that all of this is wages, and you will have to withhold.

The downside of paying employees back wages is the upfront cost and the potential that more people will come forward asking for back wages. You probably have not budgeted for that additional expense. The upside of paying employees something is that it limits what they could recover in a lawsuit — which could make it less attractive to a lawyer. Paying employees when you discover the issue could also help show that the pay mistakes were not willful, which could limit the period at issue to only two years instead of three, and could possibly help show you acted in good faith, which could eliminate liquidated damages.

Again, your lawyer will have some good strategies on how to deal with this.

If you want to limit the chances of this happening, consider a wage-and-hour audit. Again, you will want to get your lawyer involved to make the audit privileged and provide guidance along the way. If you discover some folks who are misclassified or not being paid overtime appropriately, go back to steps three and four.

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